U.S. Q1 GDP Growth Revised Down to 1.6% Annually, Corporate Profits Outperform

U.S. economic growth for the first quarter was revised down to a 1.6% annual rate, falling short of both initial estimates and market expectations of 2.0%. This deceleration in Gross Domestic Product (GDP) primarily reflects downward adjustments in inventory levels and personal consumption, which outweighed upward revisions in residential construction and net exports. While headline growth moderated, a closer examination reveals varied performance across key sectors.

Despite the downward revision to overall GDP, economy-wide corporate profits demonstrated resilience, increasing by 0.9% in the first quarter and marking a 12.0% rise from a year ago. Notably, excluding the Federal Reserve's return to profitability, corporate profits grew 0.9% in Q1 and 11.0% year-over-year, representing the fastest four-quarter growth since 2023. This increase was driven entirely by domestic non-financial industries, which saw profits climb 3.7%. In contrast, profits from domestic financial companies decreased by 0.3%, and international profits declined by 9.8%.

Focusing on "core" GDP, which comprises personal consumption, business fixed investment, and residential construction—components often considered more indicative of underlying economic health due to their exclusion of volatile elements like inventories, government spending, and trade—growth was revised slightly lower to a 2.4% annual rate from an initial 2.5%. This modest downward adjustment stemmed from weaker consumer spending on services and a slight reduction in business investment in intellectual property.

The divergence between headline GDP and core GDP growth in Q1 is largely attributable to the volatile nature of international trade, which subtracted a significant 1.3 percentage points from the headline figure. The persistence of volatility in this category is anticipated, influenced by factors such as recent Supreme Court decisions related to tariffs and ongoing geopolitical events.

A significant concern highlighted in the report is the persistent inflation, with the GDP price index rising at a 3.5% rate in Q1 and up 3.3% from a year prior. This elevated inflation remains well above the Federal Reserve's 2.0% target. Nominal GDP, which accounts for both real growth and inflation, increased at a 5.2% rate in the first quarter and 5.9% over the past year—both figures exceeding the current target for short-term interest rates. The full impact of recent energy price increases is still expected to filter through the data, suggesting that near-term interest rate cuts are unlikely. However, recent trends in M2 money supply growth may indicate a potential for lower inflation in the future.

Key terms:

1. **Gross Domestic Product (GDP)**: The total monetary value of all finished goods and services produced within a country's borders in a specific time period.

2. **Nominal GDP**: GDP measured at current market prices, without adjusting for inflation.

3. **Real GDP**: GDP adjusted for inflation, providing a more accurate measure of economic growth over time.