U.S. economy was a lot stronger in first quarter, final GDP estimate shows

REAL ECONOMY BLOG | June 29, 2023

Authored by RSM US LLP

The U.S. economy was stronger in the first quarter than previous estimates indicated, the Bureau of Economic Analysis reported on Thursday.

The third and final estimate of gross domestic product showed a drastic upward revision to a 2.0% gain from 1.3% on a quarterly and annualized basis. The increase was driven by a boost in personal spending, which was revised to a 4.2% increase from 3.8%.

Core inflation in the first quarter was revised down by 0.1 percentage point, to 4.9%, adding another factor that helped boost real GDP growth.

Robust consumer spending in the first quarter should add some pressure on the second quarter data just to keep up. Our GDP forecast remains at a 1.8% increase for the second quarter, which would represent a modest slowdown.

Another point of concern came from the discrepancy between GDP and gross domestic income, which fell by 1.8% in the first quarter, the second straight drop.

That highlighted how excess savings have been the biggest tailwind for robust spending since last year as income has not kept up with spending.

More data on spending and income is coming out on Friday, which should provide a much better sense of what the second quarter is heading toward. A marked slowdown in spending is expected for May’s number.

Jobless claims

In a separate report, initial jobless claims fell sharply to 239,000 from 265,000 last week, a holiday week. New claims are often hard to get a true measure on whenever a week is cut short by days off.

Although our advanced measure for new claims—the percentage difference between the three-month average and the 12-month low—fell to 20.2% from 21% earlier, the key threshold remained recessionary.

At the same time, continuing claims fell to 1.74 million from 1.76 million for the week ending June 17.

The takeaway

Overall, Thursday’s data did not change our view in favor of the Federal Reserve raising its policy rate by another 25 basis points in July given how elevated inflation has been.

On Friday, we expect the top-line personal consumption expenditures index—one of the Fed’s key measures of inflation—to fall into the 3% range for the first time in two years, while the core index, which excludes food and energy prices, should remain above 4.5% on a year-ago basis, a lot stickier.