The Bureau of Economic Analysis reported that the U.S. economy grew an annualized 1.4 percent in the first quarter in newly revised figures, up from 1.2 percent in its prior estimate. The increase stemmed largely from better consumer spending and export data in this revision. Personal consumption expenditures rose 1.1 percent at the annual rate in the first quarter, which was an improvement from the prior estimate of 0.6 percent but still weaker than desired. Durable goods spending declined 1.6 percent in this report, pulled lower by a sharp decrease in motor vehicles and parts. Nonetheless, consumer spending added 0.75 percentage points to headline GDP growth, up from 0.44 percent in the estimate released last month.
At the same time, goods exports increased 10.5 percent at the annual rate, an improvement from the 8.4 percent gain in the prior report. In addition, the decline in goods imports shifted from 4.5 percent to 4.4 percent in this release. As a result, the contribution to GDP growth from net exports rose from 0.13 percent in the earlier estimate to 0.23 percent. After a large drag on growth in the fourth quarter of 2016 from net exports, this was a sign that international activity had stabilized somewhat in the early months of 2017.
Meanwhile, business spending pulled back slightly, even as that category remained a bright spot in the first quarter data. Nonresidential fixed investment slipped from an annualized 11.4 percent gain in the prior report to a still healthy 10.4 percent increase in this release. It added 1.23 percentage points to top-line real GDP growth, boosted by strong jumps in spending on equipment and structures. The increase in nonresidential investment in structures, for instance, was the best in three years. Moreover, residential investment also saw healthy gains in the first quarter, increasing an annualized 13.0 percent and adding 0.48 percent to GDP growth.
In contrast to those measures, reduced spending on inventories subtracted 1.11 percentage points from real GDP—its largest drag. The silver lining is that better spending on inventories in the second quarter should help to propel a rebound in growth. Finally, government spending subtracted 0.16 percentage points from headline growth, ending two quarters of positive contributions, with reduced spending at all levels.
Overall, we traditionally have a sluggish first quarter followed by a strong rebound in the second quarter. My current forecast is for at least 3.0 percent growth in real GDP in the second quarter, with the economy expanding 2.3 percent for 2017 as a whole. Of course, these estimates might drift higher with passage of more pro-growth policies, especially in terms of the outlook later this year and into 2018.
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