US Q1 GDP growth revised to 1.1 pct; weak consumption raises concern of household sector’s health

The real GDP of the U.S. economy was revised up in the third estimate. The economy grew at an annual rate of 1.1 percent quarter on quarter in the first quarter of 2016 as compared with the earlier estimate of 0.8 percent, according to Bureau of Economic Analysis. The headline composition to GDP was consistent with consensus expectations of 1 percent.

The Bureau of Economic Analysis stated that the rise in real GDP in Q1 reflected “positive contributions from personal consumption expenditures, residential fixed investment, state and local government spending, and exports.”

Growth in private consumption was surprisingly revised downwards to 1.5 percent from the initial estimate of 1.9 percent. Consumption of durable goods declined more than what was anticipated earlier.

It fell 1.6 percent, as compared with the initial estimate of a decline of 1.2 percent. Spending on services and non durable goods have also been revised down and indicate less growth at the beginning of the year. Spending on services grew 2.1 percent as compared with prior estimate of 2.6 percent, whereas spending on non durable goods was 1 percent.

Apart from consumer spending, most of the revisions to the first quarter output were consistent with projections. The slump in structures was revised to -7.9 percent from initial -8.9 percent, whereas equipment investment was revised up to -8.7 percent from -9 percent. Moreover, intellectual property investment grew 4.4 percent, as compared with the initial estimate of -0.1 percent.

Meanwhile, residential investment continues to indicate strong growth at 15.6 percent. Initially, it was estimated to have grown 17.1 percent.  Trade data for the first quarter was revised and shows modestly stronger demand for the US goods. The drag of 0.2 percentage point from net trade on growth was revised to a positive contribution of 0.1 percentage points. Revisions to government spending and inventories were consistent with projections, noted Barclays in a research report.

Sales to domestic buyers have slowed for four straight quarters. It decelerated to 1.2 percent in Q1 quarter from 1.7 percent in Q4. Given this, the downside risks to the US outlook continue to rise. A part of the sluggishness in investment in the first quarter might be due to residual seasonality; however, consumer spending data indicates no evidence of statistical noise, added Barclays.

Therefore, the surprising downward revision to the real consumption in the first quarter brings up concerns regarding the household sector’s health. The data released in the second quarter implies a strong rebound in consumer spending; but deceleration of last quarter might prove to be temporary.

Moderate growth in the first quarter profit, which signifies subdued growth abroad, a stronger US dollar and slack in domestic manufacturing, implies that the weak investment data in Q1 is unlikely to rebound strongly in 2016, according to Barclays.

“Overall, we maintain our outlook for a moderate 2.0% growth environment for the remainder of 2016, based on a rebound in household spending that looks to be well underway in Q2,” added Barclays.