As expected, US GDP for the first quarter was revised down to a modest decrease in today’s update from the Bureau of Economic Analysis. Economic activity slumped 0.7% in the first three months of the year in seasonally adjusted annualized terms, below the mild 0.2% rise previously reported. The negative revision certainly adds a bit more gloom to the macro outlook. But for the moment it’s still reasonable to reserve judgment. The headline data for the quarterly comparison looks troubling, but it’s not yet a definitive signal that the economic recovery is dead.
For starters, GDP continues to rise at a moderate pace on a year-over-year basis. In fact, even after today’s negative revision, output is higher by 2.7% in Q1 vs. the year-earlier level—the highest gain in more than a year. Considering the broad trend from this perspective raises the possibility that the quarterly dip is noise.
Meantime, some of today’s revisions were in the positive column. Residential fixed investment, for example, was stronger than initially estimated, rising 5.0% in Q1 vs. the previous quarter—quite a bit more than the 1.3% gain in the previous estimate. Business equipment also posted a stronger rise in today’s revision vs. the “advance” estimate: 2.7% vs. 0.1%.
We also learned in today’s report that disposable personal income (DPI) continues to rise at an encouraging if slightly lesser rate than initially estimated. That’s a clue for thinking that the slowdown in consumer spending may pick up in the months ahead. Fed Chair Janet Yellen said as much last week, advising that “the US economy seems well positioned for continued growth. Households are seeing the benefits of the improving jobs situation.” A recent survey of economists by Bloomberg is on board with that view, with the crowd anticipating a 2.7 percent gain for GDP in Q2 and household-spending’s rise ramping up to 3.2% vs. 1.8% in the first quarter.
But the outlook is tempered when we look at the Atlanta Fed’s nowcast for Q2 GDP, which is currently a mild +0.7% as of May 26. That’s an improvement over Q1’s contraction, but it’s still too weak to inspire much confidence in the notion that there’s a rebound underway.
This much is clear: if we don’t see a meaningful revival in Q2 growth, macro risk will rise substantially and elevate the potential for a new recession to the tipping point. Indeed, estimating the probability of recession with a probit model using today’s revised GDP data raises the danger level to 42%–the highest since 2014’s first quarter.
We’ve been here before and the clouds turned out to be a false alarm. Indeed, last year’s Q1 slump, which was much deeper than the latest dip, was a temporary affair. That’s probably true this time as well, based on signs to date across a spectrum of indicators.
The numbers so far for Q2 still look weak in some corners, but there’s enough of a hum to suggest that growth is strengthening. The key reason for remaining optimistic: the labor market. Payrolls are still expanding at a robust pace and jobless claims continue to point to ongoing growth, as I discussed yesterday. If that gives way, the outlook will turn much darker. For the moment, however, the trend in payrolls looks upbeat. The question is whether next week’s employment report for May will reaffirm that trend?