Highlights:
- The upward revision to headline GDP was slightly stronger than expectations for a 2.0% reading
- Consumer spending growth was revised up to 3.5% from 3.0% in the second estimate (and 2.5% in the advance estimate). The build in inventories was also slightly larger with partial offset from moderately less net exports and non-residential business investment.
- Risks have increased that fiscal stimulus we’ve incorporated into our outlook later this year will not be as large as previously assumed. Nonetheless, we expect positive momentum in the economy will persist going forward at a pace that is strong enough to warrant further Fed interest rate hikes. Our forecast assumes 2 additional 25 basis point increases in the fed funds target range this year following the hike in March.
Our Take:
Although somewhat stronger than expected (and arguably with more encouraging details given the upgrade to consumer spending growth), changes in the third (and ‘final’) estimate of Q4 GDP growth were minor on balance and had little impact on our assessment of the underlying pace of growth in the economy which remained above-trend over the second half of last year. Looking ahead to Q1/17, growth in consumer spending appears to have slowed to a pace less than half of the average 3 1/2% increase over the last three quarters; however, continued strong improvement in labour markets and household incomes, low interest rates and surging consumer confidence all suggest that pause will be short-lived while tomorrow’s monthly consumer spending report (which will provide the monthly detail behind the upward revision to quarterly consumer spending reported today) will provide more clarification on the extent to which upward revisions to Q4 spending are reflected in stronger momentum early in 2017 than has previously been reported. There also remains some downside risk to near-term growth from the often-volatile net trade and inventory components; however business fixed investment in Q1, encouragingly, looks on track to rise at its strongest pace in since Q3/14. On balance, data released to-date remains consistent with our forecast that GDP growth overall was little changed in Q1 at 2.0%.
