GDP Still Did Fine

The second estimate of Q1 US GDP hit this morning—and, unusually for revisions, it stole headlines. The sharper-than-estimated headline slowdown caused some gloom, as did the markdown in consumer spending that largely drove it. Coverage called it “harder to dismiss” than the preliminary report.^[i] But a quick data dive shows this take misses the mark. Stocks’ economic driver didn’t deteriorate in any meaningful way.

When the advance estimate hit last month, the headline slowdown from Q4’s 3.4% annualized growth to 1.6% caught eyeballs.^[ii] But the big drag from inventories (always open to interpretation) and surging imports (which detract from GDP but represent domestic demand) kept the gloom tempered. With these erratic components playing a big role and consumer spending initially reported at 2.5% growth, many observers decided things looked fine.^[iii]

Now? Not so much. Consumer spending’s downward revision to 2.0% led headlines to claim domestic demand is slowing significantly.^[iv] So did the first estimate of gross domestic income (GDI), released in tandem with Thursday’s GDP revision. It slowed from Q4’s downwardly revised 3.6% annualized to 1.5%.^[v] Cue all the “soft landing” chatter.

We think it is all overstated. Exhibit 1 shows a detailed look at the first and second estimates of Q1 GDP and its major components. As you will see, while consumer spending got the downward treatment, business investment and residential real estate got a lift. So did exports. And those erratic detractors? They detracted in an even bigger way, with imports growing more than initially reported and inventories subtracting more.

Most importantly, though, the core private sector demand components—consumer spending, business investment and real estate—didn’t change much from the initial estimate, which pegged their combined growth at 2.6% annualized. The revised figure? 2.4%, in line with the longer-running trend.

Exhibit 1: A Close Look at Revised GDP

Source: US Bureau of Economic Analysis (BEA), as of 5/30/2024. *Inventories are in percentage-point contributions to the headline growth rate, the only way the BEA publishes the figure. All other figures are annualized growth rates.

Interestingly, real estate’s eye-popping growth rate—and two percentage-point upward revision—wasn’t enough to prevent a private sector demand slowdown. This speaks to an important point we have long made: Residential real estate is too small a GDP component to swing things much. Even at a revised 15.4% annualized growth rate, it contributed just 0.57 percentage point to headline growth.^[vi] Business investment, which grew 3.3%, contributed almost as much.^[vii]

The balance of business investment also shifted. Investment in structures flipped from a -0.1% annualized decline in the first estimate to 0.4% growth.^[viii] Intellectual property products, which includes software and research and development, improved from 5.4% annualized to 7.9%.^[ix] But long-suffering equipment investment got slashed from 2.1% growth to just 0.3%.^[x] While disappointing, it also hints at businesses’ shift from two years of cutbacks to an offensive posture having yet to really show in the data. That should change as more capital gets to work. You can also see this in the bigger-than-estimated fall in inventories, which implies greater tailwinds from restocking ahead.

Don’t get us wrong: These data are all backward-looking. They reflect what happened in January, February and March. Stocks have long since lived that, priced it and moved on. But a downward GDP revision that tugs on sentiment helps expectations stay mild. You can see that in all Thursday’s “soft landing” talk. But a growing economy isn’t landing. Slowing growth doesn’t imply more slowdowns ahead. Hence, the stage looks set for even modest improvement to be a big positive surprise.