1st Quarter GDP Revised to Show Economy Shrunk at a 1.6% Rate

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Summary: modest revision. The internals were revised as much as I’ve ever seen. PCE growth from 3.1% to 1.8%, real gross private domestic investment growth from 0.5% to 5.0%. Mostly due to greater inventories. Those 1st quarter inventories set up the 2nd quarter for a fall.

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1st Quarter GDP Revised to Show Our Economy Shrunk at a 1.6% Rate

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The Third Estimate of our 1st Quarter GDP from the Bureau of Economic Analysis indicated that the real output of our goods and services decreased at a 1.6% annual rate in the quarter, revised from the 1.5% contraction rate reported in the second estimate last month, as downward revisions to personal consumption of durable goods and services more than offset upward revisions to fixed investment and inventories….in current dollars, our first quarter GDP grew at a 6.55% annual rate, increasing from what would work out to be a $24,002.8 billion a year output rate in the 4th quarter of last year to a $24,386.7 billion annual rate in the 1st quarter of this year, with the headline 1.6% annualized rate of decrease in real output arrived at after an annualized inflation adjustment averaging 8.2%, aka the GDP deflator, was computed from the price changes of the GDP components and applied to their current dollar change…since that inflation adjustment was revised from the 8.1% adjustment indicated in the second estimate, it would thus account for the revision to GDP by itself…

As we review this month’s revisions, remember that the press release reports all quarter over quarter percentage changes at an annual rate. Which means they’re expressed as a change usually a bit over 4 times of what actually occurred from one 3 month period to the next. The prefix “real” is used to indicate that each change has been adjusted for inflation using price changes now chained from 2012, and then that all percentage changes in this report are calculated from those 2012 dollar figures, which would be better thought of as a quantity indexes than as any reality based dollar amounts….for our purposes, all the data that we’ll use in reporting the changes here comes directly from the Full Release & Tables for the third estimate of 1st quarter GDP, which is linked to on the BEA’s main GDP page….specifically, we’ll be using table 1, which shows the real percentage change in each of the GDP components annually and quarterly since the 2nd quarter of 2018; table 2, which shows the contribution of each of the components to the GDP change for those quarters and years; table 3, which shows both the current dollar value and inflation adjusted value of each of the GDP components; and table 4, which shows the change in the price indexes for each of the GDP components…the full pdf for the 1st quarter’s 2nd estimate, which this estimate revises, is here…

Real personal consumption expenditures (PCE), the largest component of GDP, was revised from the 3.1% growth rate reported last month to indicate real PCE grew at a 1.8% rate with this estimate. PCE growth figure represents the effect of deflating the 9.1% growth rate in the dollar amount of consumer spending with the PCE price index, which indicated consumer inflation grew at a 7.1% annual rate in the 1st quarter, which was revised from the 7.0% PCE inflation rate published a month ago….real consumption of durable goods grew at a 5.9% annual rate, which was revised from the 6.8% growth rate shown in the 2nd estimate, and added 0.49 percentage points to GDP, as growth in real consumption of motor vehicles and parts at a 16.2% rate accounted for more than two-thirds of the quarter’s growth in durable goods….on the other hand, real consumption of nondurable goods by individuals shrunk at a 3.7% annual rate, the same contraction rate that was reported in the 2nd estimate, and subtracted 0.56 percentage points from 1st quarter economic growth, as lower real consumption of gasoline and other energy goods accounted for 40% of the first quarter’s nondurable goods pullback…..meanwhile, consumption of services was seen growing at a 3.0% annual rate, revised from the 4.8% growth rate reported last month, and added 1.31 percentage points to the final GDP tally, as growth of the output of nonprofit institutions serving households accounted for 20% of the first quarter’s growth in services….

Meanwhile, seasonally adjusted real gross private domestic investment grew at a 5.0% annual rate in the 1st quarter. Revised from the 0.5% growth rate estimate reported last month, as real private fixed investment grew at a 7.4% rate. Revised from the 6.8% rate reported in the second estimate, while business and farm inventories grew by more than had been previously estimated…real investment in non-residential structures was revised from shrinking at a 3.6% rate to shrinking at a 0.9% rate, while real investment in equipment was revised to show growth at a 14.1% rate, revised from the 13.1% growth rate reported in the 2nd estimate…at the same time, the 1st quarter’s investment in intellectual property products was revised from real growth at a 11.6% rate to real growth at a 11.2% rate, while growth in real residential investment remained at a 0.4% rate, same as reported a month ago…after those revisions, the contraction in investment in non-residential structures subtracted 0.02 percentage points from 1st quarter GDP, while the increase in investment in equipment added 0.73 percentage points to the quarter’s growth, the increase in investment in intellectual property added 0.56 percentage points, and the increase in residential investment added 0.02 percentage points to the 1st quarter’s growth rate…

At the same time, the 1st quarter’s growth of real private inventories was revised from the previously reported $149.6 billion in inflation adjusted dollars to show inventories grew at an inflation adjusted $188.5 billion rate. This came after inventories had grown at an inflation adjusted $193.2 billion in the 4th quarter, Hence, the $4.7 billion negative change in real inventories from those of the 4th quarter subtracted 0.35 percentage points from the 1st quarter’s growth rate, revised from the 1.09 percentage point subtraction due to lower inventory growth that was indicated by the second estimate….however, since growth in inventories indicates that more of the goods produced during the quarter would have been left in storage or “sitting on the shelf”, the $4.7 billion reduction in their growth conversely means real final sales of GDP were actually greater by that amount, and therefore the BEA found that real final sales of GDP fell at a 1.2% rate in the 1st quarter, revised from the 0.4% rate of decrease in real final sales shown in the second estimate…

The previously reported decrease in real exports was revised to a smaller decrease. The increase in real imports was greater than previously reported, and with those changes offsetting one another. The impact of our net trade on GDP remained as was previously reported…our real exports of goods and services shrunk at a 4.8% rate in the 1st quarter, revised from the 5.4% contraction rate shown in second estimate, and since exports are added to GDP because they are part of our production that was not consumed or added to investment in our country, their decrease conversely subtracted 0.55 percentage points from the 1st quarter’s growth rate, revised from the 0.62 percentage point subtraction due to lower exports shown last month…on the other hand, the previously reported 18.3% increase in our real imports was revised to a 18.9% increase, and since imports subtract from GDP because they represent either consumption or investment that is added to GDP with those figures but was not produced in the US, their increase subtracted 2.69 percentage points from 1st quarter GDP, revised from the 2.61 percentage point subtraction shown a month ago….thus, the deteriorating trade balance that has accompanied the increase in consumer spending subtracted a rounded 3.23 percentage points from 1st quarter GDP, same as the subtraction resulting from a worsening foreign trade balance that was indicated by the second estimate….

Finally, there were also modest revisions to real government consumption and investment in this 3rd estimate. The entire government sector is now shown to be shrinking at a 2.9% rate, revised from the 2.7% contraction rate for government indicated by the 2nd estimate. The real federal government consumption and investment was seen to have shrunk at a 6.8% rate from that of the 4th quarter in this estimate, which was revised from the 6.1% contraction rate shown in the 1st estimate, as real federal outlays for defense shrunk at a 9.9% rate, revised from the 8.5% rate that was previously reported, and subtracted 0.39 percentage points from 1st quarter GDP, while real non-defense federal consumption and investment shrunk at a 2.5% rate, revised from the 2.6% rate previously reported, and subtracted 0.07 percentage points from GDP…at the same time, real state and local consumption and investment shrunk at a 0.5% rate in the quarter, revised from the 0.6% contraction shown in the 1st estimate, and subtracted 0.07 percentage points from 1st quarter GDP, which was unrevised from the subtraction shown in the second estimate…note that government outlays for social insurance are not included in this GDP component; rather, they are included within personal consumption expenditures only when such funds are spent on goods or services, thereby indicating an increase in the output of those goods or services…