Economic growth in the United States was revised higher in the first quarter but was still the lowest in a year. GDP growth was revised up from the advance estimate of 0.5% on an annualized basis to 0.8% in the second estimate. The figure falls just short of forecasts of 0.9% and compares with a rate of 1.4% in the previous quarter. On a year-on-year basis, growth was unchanged at 2.0% during the first three months of the year.
The dollar briefly fell after the data as it did little to convince the markets that a June/July rate hike is a done deal. However, it later edged higher to stand up on the day, making gains against most major currencies. The greenback climbed to 109.77 yen in late European session, while the euro slipped to 1.1145 dollars.
Consumer spending was the main driver of growth during the quarter even though it was weaker than in the final three months of 2015. Personal consumption rose at an annualized rate of 1.9% in the first quarter, unchanged from the preliminary estimate but down from 2.4% in the preceding quarter.
Fixed investment proved a drag, falling by 1.5% during the quarter, slightly less than the advance estimate of -1.6%. A 17.1% jump in residential investment failed to compensate for a 6.2% drop in non-residential investment, which fell for the second straight quarter.
Net trade was also slightly better than initially thought as exports were revised up from -2.6% to -2.0%. But imports were revised lower from 0.2% to -0.2%. This helped improve the net contribution of trade to GDP growth from -0.34% to -0.21%. However, this still represents the second consecutive quarter of declining exports, highlighting the ongoing impact of weak global demand and the strong dollar on US exporters.
There was no change in the PCE price index though and the core rate, which excludes food and energy, was confirmed at 2.1% in the first quarter. This is an acceleration from the previous quarter’s 1.3% rate but has yet to worry the Fed who is seeking further evidence of a sustained rise in inflationary pressures.
Recent comments from several Fed policymakers suggest that many within the FOMC are already concerned about the pickup in inflation and the tightening labor market. However, some participants are likely to maintain a more cautious stance given the weaker growth in 2016 and uncertain global economic environment. This could potentially lead to a split vote in the upcoming FOMC meeting on June 14-15 and makes next week’s non-farm payrolls report all the more important as investors look for clues for the Fed’s next move.
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