U.S. Q1 GDP Revised Up to 2.1%, Underlying Consumer Spending Weakens

U.S. real Gross Domestic Product (GDP) increased at an annualized rate of 2.1% in the first quarter, a notable upward revision from the prior estimate of 1.6% and surpassing the consensus forecast. While the headline figure suggests stronger growth, a closer examination of the underlying components reveals a more nuanced picture, with significant shifts in various sectors.

The upward revision to overall GDP was primarily driven by stronger net exports, coupled with smaller upward adjustments to inventories and business investment. These gains more than compensated for substantial downward revisions to personal consumption expenditures, particularly in services, and residential construction. The GDP price index also saw an upward revision to 3.6% annually from 3.5%, leading to an acceleration in nominal GDP growth to an annualized 5.8% from the earlier 5.2%.

Despite the improved headline GDP, a key indicator for sustainable economic expansion, "core" GDP, which excludes volatile components like government spending, inventories, and trade, registered a 1.7% annual growth rate in Q1. This marks a deceleration from the previous estimate of 2.4% and represents the slowest pace since 2022. The most significant factor contributing to this slowdown was a substantial downward revision to personal consumption, now estimated to have grown at a mere 0.5% annual rate, down from 1.4%. This is the slowest growth for this category in four years, signaling potential challenges for consumer spending momentum.

Conversely, business investment exhibited considerable strength, with a notable upward revision to a 10.6% annual rate. This robust performance is largely attributed to the ongoing expansion in data centers and equipment related to artificial intelligence initiatives. This surge in business investment was the largest contributor to Q1 real GDP growth and a significant acceleration from the 2.4% pace observed in the preceding quarter. However, excluding the components directly tied to AI investment – equipment and intellectual property – real GDP growth would have been a more modest 0.3% annually in Q1.

Corporate profits in Q1 also showed resilience, climbing 1.7% from the previous quarter, an improvement from the earlier estimate of 0.9%, and posting a solid 12.8% increase year-over-year. Real Gross Domestic Income (GDI), considered an equally accurate alternative measure of economic activity over time, rose at a 1.2% rate in Q1 and is up 2.2% from a year ago. Looking ahead, expectations are for price pressures to moderate in the latter half of the year, influenced by recent declines in energy prices following a U.S.-Iran peace agreement.

Key terms:

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

2. **Nominal GDP**: The raw GDP figure, unadjusted for inflation.

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