U.S. Q1 GDP Growth Revised Down to 1.6% Annually, Corporate Profits Up 12%

U.S. economic growth in the first quarter of this year was softer than initially reported, with real Gross Domestic Product (GDP) expanding at an annualized rate of 1.6%. This figure represents a downward revision from the prior estimate and consensus expectation of 2.0%. The deceleration in overall economic activity was primarily driven by downward adjustments to inventory levels and personal consumption expenditures, which more than offset upward revisions in homebuilding and net exports.

While headline GDP growth slowed, a closer look at underlying economic drivers reveals a more nuanced picture. So-called "core" GDP, which combines personal consumption, business fixed investment, and residential construction, grew at a 2.4% annual rate. This measure, designed to exclude more volatile components like inventories, government spending, and international trade, was also revised slightly lower from an initial 2.5%, largely due to weaker consumer spending on services and a slight dip in business investment in intellectual property. The major factor contributing to the difference between headline and core GDP growth was a significant drag from trade, which shaved 1.3 percentage points off the headline figure in Q1, a volatility expected to persist amid ongoing geopolitical developments and shifting policies.

Despite the slower pace of GDP growth, a key highlight from the report was the performance of economy-wide corporate profits. These profits rose 0.9% in the first quarter and are up a robust 12.0% from a year ago. Excluding the Federal Reserve, corporate profits saw a 0.9% increase in Q1 and an 11.0% rise year-over-year, marking the fastest four-quarter growth since 2023. This increase was driven entirely by profits from domestic non-financial industries, which climbed 3.7%, countering declines in profits from domestic financial companies (-0.3%) and international sources (-9.8%).

However, inflation remains a persistent concern. The GDP price index was revised slightly lower to 3.5% from an earlier estimate of 3.6%. Nevertheless, this rate, alongside a 3.3% year-over-year increase, indicates that inflation is still well above the central bank's 2.0% target. Nominal GDP, which includes the effects of inflation, was revised downward to a 5.2% annualized rate from 5.6%. Both the first-quarter nominal GDP growth and the 5.9% year-over-year increase remain considerably higher than the current short-term interest rate target of 3.625%. With the full impact of higher energy prices yet to be fully absorbed into the data, significant interest rate cuts are not anticipated in the immediate future, though recent trends in money supply growth suggest a potential easing of inflation following geopolitical conflicts.

Key terms:

1. **Real GDP (Gross Domestic Product):** A measure of the total value of goods and services produced in an economy, adjusted for inflation. It reflects the economy's output in constant dollars.

2. **Nominal GDP:** The total value of all goods and services produced in an economy, measured at current market prices without adjusting for inflation.

3. **GDP Price Index:** An inflation measure that tracks the average change over time in the prices of all goods and services included in GDP. It is often used as a broad indicator of economy-wide inflation.