U.S. Q1 GDP Revised Up to 2.1%, Masking Underlying Weakness in Consumer Spending

The U.S. economy’s first-quarter real gross domestic product (GDP) growth was revised upward to an annualized rate of 2.1%, surpassing the consensus expectation of 1.6%. This stronger headline figure, however, belies a more nuanced picture of economic activity, with underlying details indicating a weaker mix of components.

The upward revision to GDP was primarily driven by substantial adjustments in net exports, coupled with smaller increases in inventories and business investment. These gains were sufficient to counteract a significant downward revision to personal consumption, particularly in services.

Upon closer inspection, a measure of "core" GDP, which strips out volatile components such as government spending, inventories, and trade to offer a clearer view of sustainable growth, expanded at a 1.7% annual rate in the first quarter. This marks a decrease from the prior estimate of 2.4% and represents the slowest growth rate for this category since 2022. While residential construction has been a persistent drag, a more critical development in this report is the notable downward revision to personal consumption, now estimated to have grown at a mere 0.5% annual rate, down from an earlier estimate of 1.4%. This represents the slowest growth rate for personal consumption in four years, signaling potential struggles for consumers to maintain spending levels.

Conversely, business investment exhibited robust growth, rising at a 10.6% annual rate. This acceleration from the previous quarter's 2.4% pace was the largest contributor to Q1 real GDP, largely fueled by continued expansion in data centers and equipment related to artificial intelligence. Excluding components directly tied to AI investment, Real GDP growth in the first quarter would have been a modest 0.3%.

Further data revealed that first-quarter corporate profits increased by 1.7% from the preceding quarter, an improvement from the earlier estimate of 0.9%, and demonstrated a solid 12.8% year-over-year increase. Real Gross Domestic Income, an alternative metric for economic output, advanced at a 1.2% rate in Q1 and is up 2.2% from a year prior. GDP prices rose at a 3.6% annual rate in the first quarter and are up 3.3% from a year ago. Nominal GDP, which combines real GDP growth with inflation, increased at an annual rate of 5.8% in Q1 and 6.1% over the past year, both figures well above the current 3.625% short-term interest rate target. Analysts anticipate an easing of price pressures in the latter half of the year, as the recent decline in energy prices following the U.S.-Iran peace agreement begins to impact inflation data.

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 prices, without accounting for inflation.

3. **Personal Consumption**: Spending by households on goods and services, a key component of overall economic demand.