• The third estimate of US first-quarter 2013 annualized GDP growth was unexpectedly revised downward to 1.8% from a previously estimated 2.4%.
• The downward revision was largely attributable to much weaker consumer spending growth on services.
The third estimate of first-quarter 2013 annualized GDP growth was unexpectedly revised downward to 1.8% from the previously estimated 2.4%. Expectations going into the report had been for the growth rate to remain unchanged at 2.4%.
The downward revision could be solely attributed to growth in consumer spending on services being lowered 1.7% from the previously estimated 3.1%. This in turn lowered overall consumer spending growth to 2.6% from 3.4%. As well, the decline in spending on non-residential construction was also lowered to 8.3% from the previously assumed drop of 3.5%. There was also a slight lowering in the inventory build in the first quarter of 2013. The main offset was a better net export balance. Although exports were revised to show a decline of 1.1% versus a previously estimated increase of 0.8%, imports saw an even greater downward revision in turning an increase of 1.9% into a decline of 0.4%.
The first estimate of first-quarter 2013 GDP showed an annualized gain of 2.5%. The second estimated resulted in a minimal lowering of the growth rate to 2.4% although with a more favourable composition of output. Specifically, the contribution from inventories was lowered and was almost fully offset by stronger consumer spending and a more favourable net export balance. This third revision more than took away all of this additional strength in consumer spending with inventories lowered once again; however, the net export balance continued to provide slightly more to the overall GDP growth rate.
Despite the second consecutive downward revision, the first-quarter 2013 GDP data still indicated a strengthening in growth from the start of this year relative to the negligible 0.4% gain recorded in the final quarter of 2012. This strengthening occurred despite higher taxes introduced in January and government expenditure cuts in March. Our forecast assumes that this fiscal tightening will likely still have a lagged effect in second quarter thereby keeping the growth rate little changed at 1.9%. Beyond mid-year, however, we expect this restraining effect from fiscal policy to wane and to allow growth to strengthen closer to 3% during the final two quarters of 2013. Growth at this pace offers the prospect of putting sustained downward pressure on the unemployment rate. This is consistent with the Fed starting to reduce its asset purchases in the final quarter of this year and ceasing these purchases altogether by mid-2014.
RBC