1Q2017 Gross Domestic Product: Third Estimate

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In its third estimate of 1Q2017 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) boosted the growth rate of the U.S. economy to a seasonally adjusted and annualized rate (SAAR) of +1.42% (above consensus expectations of 1.2%); that is up by +0.26 percentage point (PP) from the previous 1Q2017 estimate, but still roughly two-thirds (-0.66 PP) 4Q2016’s +2.08%.

Although the latest SAAR was 0.26 PP higher than the second estimate, nominal (i.e., not inflation adjusted) GDP was actually $500 million lower than previously reported at the end of May. The BEA achieved its higher growth estimate by applying a lower GDP deflator (3^rd est: +1.94%) than the one used in May’s report (2^nd est: +2.21%).

Three of the four groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), and net exports (NetX) -- contributed to 1Q growth. Government consumption expenditures (GCE) detracted from it. Notable details follow:

* PCE: Upwardly revised expenditures for health care (including insurance) and housing utilities elevated PCE’s contribution to 1Q’s headline number in this revision.

* PDI: Downward revisions to nearly-stalled inventory growth overwhelmed improvements in fixed investment (especially nonresidential construction).

* NetX: Exports were revised higher while imports provided less of a drag on 1Q’s headline.

* GCE: Government spending contracted despite upwardly revised state and local outlays. 

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The notable takeaways from this report include: 

-- The largest upward revision was in consumer spending for healthcare and insurance.

-- The growth rate for consumer spending on goods remains anemic.

-- The inventory contraction worsened, possibly in anticipation of softer future consumer spending.

-- Foreign trade remained a bright spot and is not a drag on the headline number.

“The US consumer may be spending more, but that increased spending is not on discretionary ‘life-style’ goods,” concluded Consumer Metric Institute’s Rick Davis, “And as per usual, the Fed is once again projecting a return to ‘normalcy’ in the form of 3% growth in future quarters -- with consumer spending leading the way. But if this past quarter's pattern persists those consumers may continue to face a toxic mix of stagnant disposable income, rising insurance costs and shrinking savings -- not exactly a formula for happy campers.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.