The BEA’s second estimate of Q1 GDP is out, and it was uglier than expected.
GDP growth was revised down to -1.0% from a previous estimate of +0.1%.
“Ouch,” said Pantheon Macroeconomics’ Ian Shepherdson.
This was worse than the -0.5% estimated by economists.
The revised estimate, as expected, was largely due to an adjustment in inventories, which hacked 1.98 percentage points from the headline number.
Here’s the BEA: “The decrease in real GDP in the first quarter primarily reflected negative contributions from private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment that were partly offset by a positive contribution from personal consumption expenditures. Imports, which are a subtraction in the calculation of GDP, increased.”
This chart from Bloomberg Chief Economist Michael McDonough shows how the major components of GDP contributed to that -1.0% number. The change in inventories is represented by the fuscia-coloured line.
“The pace of inventory-building has fallen by more than half since its Q3 peak, and is now below the rate needed to keep inventory-to-sales ratios steady,” said Shepherdson. “That means the risk of a further significant inventory hit to Q2 growth is quite small.”
Real final sales, or GDP less change in private inventories, increased 0.6%. This was down from 2.7% in Q4.
Personal consumption growth was revised up to 3.1% from 3.0%.
Like Shepherdson, most economists are looking forward to Q2 data. After all, Q1 ended in March.
“[T]he first-quarter contraction was quite obviously due to the unusually severe winter,” said Capital Economics’ Paul Ashworth. “[T]he incoming monthly data already point to a marked turnaround in the second quarter. For those worried about a recession, it’s worth remembering that employment increased by nearly 300,000 in April and jobless claims dropped to 300,000 last week. Those numbers point to a recovery gathering some real momentum at last. We still expect second-quarter GDP growth to come in close to 3.5%.”
Here’s a table breaking down growth GDP component:
This second table accounts for the weights of each of these components and shows how each contributed to the headline growth number:
EARLIER (8:00 a.m. ET):
“A Q1 decline in real GDP does not jibe with some key metrics of the economy,” said Deutsche Bank’s Joe LaVorgna. “Case in point, nonfarm payrolls expanded by +190k per month in Q1. At the same time, the ISM manufacturing survey averaged just under 53, and both retail sales (+1.0%) and manufacturing industrial production (+2.1%) eked out annualized gains in the quarter. In other words, there appears to have been a Q1 disconnect between some key measures of output and real GDP growth.”
The personal consumption component of the report is expected to be revised up to 3.1% from an earlier estimate of 3.0%.
“Most of the adjustment down is expected to be in inventories, because the Commerce Department assumed way too much inventory accumulation in March,” explained Citi’s Peter D’Antonio. “Although this was only the second negative print of the expansion, we do not believe it was a harbinger of a slowdown or problems in the economy. Instead, we think the weakness reflected weather distortions that hampered activity.”
Most economists are communicating D’Antonio’s sentiment. And most reiterate that Q1 GDP is old news since that quarter ended in March and we have two months of encouraging Q2 data.
“The economy likely will rebound sharply in the second quarter, and the data show that this in fact is already happening,” said D’Antonio. “So we are viewing the second pass at GDP as old news, even if the economy shrank in the quarter.”
“The broader rationale for stronger growth in 2014-2015 also remains intact,” said Goldman Sachs’ Jan Hatzius. “The fiscal policy drag of 2013 has ended. The household sector debt/income ratio seems to have bottomed. And while we recently shaved our homebuilding numbers a bit, our forecast remains one of recovery.”
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