US GDP (Q1 2024 — second estimate)

Gentle economic cooling underway 

• Real GDP growth was revised lower by 0.3 percentage points (ppt) to 1.3% annualized in Q1, following a strong 3.4% gain in Q4 2023 and above-2% growth in the prior six quarters. Overall, the report continues to paint the picture of an economy with resilient but cooling momentum. Indeed, final demand to private domestic purchasers – a better gauge of the underlying pace of economic activity that strips out the volatile components – posted a 2.9% advance compared to 3.1% previously estimated.
    
  
  • Consumer spending growth was revised 0.5ppt lower to a still-solid 2% as a plunge in spending on durable goods was offset by strong spending on services. 
  • Business investment growth was slightly upgraded to 3.3% as downward revisions to growth in equipment investment were offset by stronger structures outlays and more robust intellectual property investment. 
  • Residential investment was revised up 1.5ppt to a remarkable 15.4% advance, supported by resilient construction activity. 
  • Government spending grew 1.3%, roughly in line with the prior estimate, with the advance reflecting slower growth in state and local outlays and a contraction in federal outlays.
  • Meanwhile, business inventories are now estimated to have been a 0.5ppt drag on GDP growth in Q1 while the large negative contribution from net trade was unchanged and shaved 0.9ppt off GDP growth on strong import growth. 
     
•  On the inflation front, price pressures eased modestly in Q1 with headline inflation cooling 0.3ppt to 2.5% year over year (y/y) – the lowest since Q1 2021 – and core personal consumption expenditures (PCE) inflation softening 0.4ppt to 2.8% y/y – also the lowest since Q1 2021. We foresee headline and core PCE inflation ending the year around 2.6% y/y. 
   
  
• The report also provided the first glance at how companies fared during the first quarter, and the data showed that profits fell modestly after rising strongly in H2 2023. Before-tax corporate profits declined by $21.1b following strong increases of $133.5b and $108.6b in the prior two quarters. Profit margins narrowed 0.2ppt to 12% of GDP, down from their 12.8% peak in Q2 2022 but at a level that is still elevated by historical standards.
    
• Overall, economic activity remains robust, powered by consumers’ ongoing ability and willingness to spend. But momentum is gradually slowing as labor conditions cool, with younger and lower-income consumers exercising more scrutiny and businesses re-evaluating their talent needs as they face higher financing costs and cooler demand. 
   
• While real GDP growth is on track to remain solid in Q2 at around 2.5% annualized, economic activity is likely to decelerate further in coming quarters. We anticipate real GDP growth at 2.5% in 2024 and slowing to 1.7% in 2025.
   
• Against this backdrop, Fed patience at these elevated interest rates could be seen as a virtue, but prudence in avoiding excessively tight policy would be one, too. We continue to expect two rate cuts of 25 basis points (bps) in 2024, in July and November, as core disinflation reasserts itself and labor market conditions soften.
   

In the details: 

Real GDP growth was revised down 0.3ppt to 1.3% in Q1 while gross domestic income (GDI) rose 1.5%. As a result, gross domestic output (GDO) – which is the average of GDP and GDI – climbed 1.4% in Q1, which marked the slowest advance since Q2 2023. Looking at the broader trend, economic momentum cooled slightly in Q1 with GDP growth slowing from 3.1% y/y in Q4 2023 to 2.9% y/y. In contrast, GDI growth firmed from 1.6% y/y to 1.9% y/y in Q1.

Consumer spending rose a downwardly revised 2%, a notable step down from the strong 3.3% gain in Q4. The downgrade was led by a sharp decline in durables spending, which are now reported to have plunged 4.1% on the back of weaker spending on motor vehicles (-13.4%). Spending on nondurables was also revised lower to a 0.6% contraction on plunging gasoline outlays (-8.9%). The weakness in goods spending was more than offset by robust services spending growth of 3.9%, roughly in line with the prior estimate. The gain was driven by strong spending on health care (+6.5%), transportation (+6.1%) and recreation (+4.3%). Looking ahead, we expect consumer spending growth to slow further throughout 2024 as labor market momentum softens and cost fatigue sets in, though momentum should remain positive. 

Residential investment saw an even stronger 15.4% surge in Q1 though it remains down 15% from its 2021 Q1 peak. We anticipate modest residential investment growth heading into 2025 as activity will remain constrained by historically low affordability and moderating income growth. Construction activity is, however, still likely to benefit from a severely undersupplied housing market.

Business investment growth was modestly upgraded to a 3.3% advance, compared to 2.9% initially reported. Stronger outlays in intellectual property (+7.9%) and structures investment (+0.4%) were partially offset by downward revisions to equipment spending (+0.3%). With headwinds such as elevated interest rates, tight credit conditions and sluggish global demand still blowing, business spending is likely to remain constrained in the near term. But we foresee a gradual recovery later this year as stronger global growth and lower interest rates support capex momentum.

Government spending was slightly firmer, up 1.3% annualized in the second estimate compared to 1.2% initially reported. 

Inventories subtracted 0.5ppt to real GDP growth in Q1, compared to a 0.4ppt negative contribution previously reported, as businesses continued to slow their restocking effort. 

Meanwhile, the drag from net trade on GDP growth was unchanged, subtracting 0.9ppt to growth amid strong imports growth of 7.7%, which appears to have been driven by solid domestic demand and rebounding tourism activity. Looking ahead, we anticipate cooler imports as domestic activity slows and moderate exports momentum as global activity only gradually firms.