- Revisions to first quarter real GDP were fairly uneventful, with growth in the quarter as a whole revised down one tick to 3.1% (annualized). This was slightly better than the 0.2 percentage point (pp) downward revision markets were expecting. The most noteworthy revision was to core inflation, the Fed’s preferred measure, which was revised down to a 1.0% annualized pace in Q1, from 1.3% in the advance estimate.
- As in the advance release, real GDP was boosted by temporary factors. The combination of net exports and an inventory build contributed 1.6 pp to growth, down very slightly from the 1.7 pp contribution in the advance estimate.
- Consumer spending remained soft in the second estimate, if revised up slightly to 1.3% (from 1.2%), as all categories of spending were revised up slightly.
- Strength in PCE was partly offset by a downward revision to business investment, which rose 2.3% (versus 2.7% previously). The subcomponents were a mixed bag. Spending on structures was stronger +1.7% (-0.8% prev.), equipment was weaker (-1.0%, vs 0.2% prev.), as intellectual property (+7.2% vs +8.6% prev.).
- Residential investment was a bit worse than initially reported (-3.5% vs. -2.8% prev.).
- Government spending was revised up one tick to 2.5%.
- Corporate profits are released with the second estimate of GDP, and profits fell $65.4 billion in Q1, on top of a $9.7 billion decline in Q4. Corporate profits before taxes are now up only 3.1% on a year-on-year basis, a notable deceleration from a 10.4% pace as recently as Q3 2018.
Key Implications
- The revisions to the growth side of the economy were fairly staid. The story of strong headline growth in the first quarter boosted by temporary factors remains intact. As the temporary factors reverse in Q2, growth is likely to slow below 2%.
- The bigger story is that inflation softness in Q1 was more pronounced than expected. Tomorrow we will get income and spending data for April, along with the PCE inflation data, and will see whether the inflation soft spot at the start of the year was indeed transitory, or if the Fed needs to more seriously consider the prospect of insurance rate cuts
