Solid GDP revision doesn't change lackluster outlook
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The final print of first-quarter gross domestic product (GDP) was revised up from 1.2 percent to 1.4 percent, surpassing expectations of virtually no change, according to Bloomberg. Year on year, the U.S. economy expanded at a 2.1-percent pace compared to a previous reading of 2.0 percent reported in the second-round report, maintaining the minimal trend of growth established since the financial crisis.  

In the details, personal consumption was revised up from 0.6 percent to 1.1 percent in the final Q1 print, suggesting consumers weren't as absent from the marketplace as originally reported, although spending remains far from robust. At 1.1 percent, Q1 consumption remains at a 15-quarter low. Goods consumption was revised up from 0.3 percent to 0.5 percent in the final Q1 print and service consumption gained from 0.8 percent to 1.4 percent.  

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Gross private investment, on the other hand, was revised down from 4.8 percent to 3.7 percent in the final Q1 print, a two-quarter low, thanks to a smaller build in inventories. Inventories gained just $2.6 billion in Q1, the smallest quarterly build since Q2 2016.

  

Fixed investment, meanwhile, was revised down minimally from 11.9 percent to 11.0 percent in the final Q1 print, still the strongest quarterly gain in the past five years. Nonresidential investment, viewed as a proxy for corporate investment, was revised down slightly from 11.4 percent to 10.4 percent in the final print with still sizable gains in structures (+22.6 percent), equipment (+7.8 percent) and intellectual property (6.4 percent).  

After years of near-zero or negative investment, corporate America began to loosen its purse strings at the start of the new year; but, without the consumer following suit, this will no doubt prove a temporary improvement, hardly offsetting previous years of minimal activity.  

Residential investment was revised down minimally from 13.8 percent to 13.0 percent in the final Q1 print, still the strongest quarter of residential investment since Q4 2015. No longer the large net drag on the economy as it was in the aftermath of the financial crisis, housing isn't the primary driver of the economy either. Nevertheless, the housing market has been a consistent, welcome contributor to topline GDP.  

On the trade side, exports were revised up from 5.8 percent to 7.0 percent in the final Q1 print, thanks to a 10.5-percent increase in goods, revised up from an 8.4-percent increase, as well as a 0.7-percent increase in services. A strong U.S. dollar continues to restrain global demand for U.S.-made goods. Imports were also revised slightly higher from 3.8 percent to 4.0 percent thanks to an upward revision in goods from 4.2 percent to 4.4 percent and an increase in services from 1.9 percent to 2.4 percent in the final Q1 GDP report. 

Finally, government consumption was revised up for a smaller loss of 0.9 percent in the final Q1 GDP print. Federal spending was unchanged at -2.0 percent; however, state and local expenditures were revised higher from a loss of 0.6 percent to a smaller reduction of 0.2 percent. 

Here's the bottom line: The latest first-quarter GDP report showed the U.S. economy grew at a slightly more positive pace across the early months of the year than originally reported. However, an upward gain from a first-round report of 0.7 percent, to a second-round report of 1.2 percent, to 1.4 percent in the final reading, while a step in the right direction, does little to adjust the underlying storyline of the U.S. economy at the start of 2017.

That storyline is this: Following modest growth at the end of 2016, the U.S. economy lost significant momentum at the start of the new year with the U.S. consumer pulling back considerably amid ample uncertainty and still-modest labor market gains. 

Businesses were in part buoyed by optimism to increase investment amid anticipation of pro-growth policies on the fiscal side, but the failure to see underlying improvement, particularly from the consumer, left momentum stagnant and fundamentals lackluster at best. 

Both growth and inflation in the first quarter fell well short of the Fed’s expectations to justify an advanced pathway to higher rates in the early months of 2017, let alone going forward. At this point, it remains crystal clear that after years of unprecedented support from monetary policy, the U.S. economy remains range-bound at a lackluster 2-percent pace with growing risks to the downside.

Lindsey Piegza, Ph.D., is the chief economist for Stifel Fixed Income. She has had her research published in Harvard Business Review and in textbooks for Northwestern University's Kellogg Graduate School of Management. She's a regular guest on CNBC, Bloomberg, Fox News and CNN.


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