Q1 GDP Revised Down, But Q2 Nowcasts See Firmer Growth

US economic growth rose a modest 1.3% in the first quarter, a softer increase vs. the government’s initial 1.6% estimate. The revised data reflects a sluggish pace of growth and the second straight quarterly downshift. But the current nowcast for Q2 suggests that output will stabilize if not strengthen, based on the median for a set of estimates compiled by CapitalSpectator.com.

US economic activity is expected to increase 2.0% in the April-through-June period, according to the median nowcast. If correct, the advance will mark a solid rebound in growth over Q1’s 1.3% rise and the first quarterly acceleration since Q3 2023.

US Real GDP Change

Today’s revised median Q2 nowcast is in line with recent estimates. More than a week ago, for instance, we reported a median nowcast of 1.9%.

As for Q1’s weaker print, the key factor is related to a downside revision in consumer spending, notes Wells Fargo’s economics team:

In the initial estimate, goods outlays were reported to have contracted at a scant 0.4% annualized rate. All the weakness in the initial estimate was on the durable goods side with non-durable good spending flat. Today’s revisions marked down those spending estimates significantly. Goods spending is now estimated to have contracted at an 1.9% annualized rate including a 4.1% contraction in durable goods outlays and a 0.6% annualized drop in non-durable goods spending. These revisions are consistent with downward revisions to Q1 retail sales, and suggests we’ll see some revision to monthly durable goods spending.

Recent data has highlighted that consumer spending has been softening. Retail sales in April, for example, were flat after two straight solid monthly gains.

Given that consumer spending accounts for about 70% of US economic activity, the weak retail sales data raises questions about the outlook for the remainder of Q2. All of this goes back to the lagged effects of the Federal Reserve’s interest rate hikes over the past two years.

“The impact of the Fed’s tight interest rate policy is clearly visible in the first quarter GDP report,” says Bill Adams, chief economist at Comerica.

For the moment, it’s not obvious that the weaker Q1 data will spill over into Q2, or so today’s GDP nowcast suggests. The incoming data for May may determine if the relatively upbeat nowcasts for the current quarter are overly optimistic.