U.S. Q1 GDP Revised Down to 1.6% Annual Rate; Corporate Profits Up 12.0% Year-on-Year

U.S. real Gross Domestic Product (GDP) growth in the first quarter was revised significantly downward to an annualized rate of 1.6%, falling short of the previously reported and consensus-expected 2.0%. This revision indicates a noticeable slowdown in economic expansion. The primary drivers of this downward adjustment were reductions in inventory investment and personal consumption expenditures, which more than offset upward revisions in residential fixed investment and net exports.

Despite the slower headline GDP growth, a crucial takeaway from the report was a strong performance in economy-wide corporate profits. These profits increased by 0.9% in the first quarter and are up a robust 12.0% from a year ago. Excluding the Federal Reserve, which saw a return to profitability in Q4 and eked out a small profit in Q1, corporate profits grew by 0.9% in Q1 and are up 11.0% year-over-year. This marks the fastest four-quarter growth period since 2023. The gain in Q1 was primarily fueled by a 3.7% rise in profits from domestic non-financial industries, while profits from domestic financial companies declined by 0.3% and those from the rest of the world fell by 9.8%.

Analyzing the components of GDP, a measure referred to as "core" GDP—which combines personal consumption, business investment, and home building—rose at a 2.4% annual rate in the first quarter. This figure was slightly lower than the initial estimate of 2.5%, driven by weaker consumer spending on services and a slight reduction in business investment in intellectual property. The discrepancy between headline GDP and core GDP growth largely stems from volatile swings in international trade, which shaved 1.3 percentage points from the headline figure in Q1. This volatility is expected to persist due to ongoing global trade dynamics and geopolitical factors.

The report also highlighted persistent inflationary pressures, with the GDP price index revised lower to 3.5% from an initial estimate of 3.6%. However, this remains considerably above the Federal Reserve's 2.0% target. Nominal GDP growth, which includes inflation, was revised down to a 5.2% annualized rate from 5.6%. Both the quarterly 5.2% rate and the 5.9% year-over-year increase in nominal GDP are notably higher than the current 3.625% target for short-term interest rates. With the full effects of higher energy prices still working through the economy, a near-term reduction in interest rates appears unlikely. However, recent growth in the M2 money supply could suggest decelerating inflation in the future.

### Key terms

1. **Real GDP**: Gross Domestic Product (GDP) adjusted for inflation, reflecting the actual volume of goods and services produced.

2. **Nominal GDP**: Gross Domestic Product (GDP) measured at current market prices, without adjusting for inflation.

3. **Core GDP**: A measure of economic growth that excludes volatile components like inventories, government spending, and trade to provide a clearer picture of underlying economic activity, typically focusing on consumer spending, business investment, and residential construction.