US GDP Increased Faster than Expected in The First Quarter

The US economy grew faster than was thought in the first three months of the year, the Commerce Department said Thursday.

Gross domestic product, the largest measure of economic output, grew at an annualized rate of 1.3% in the first quarter, which was higher than the initial estimate of 1.1% reported last month. GDP is changed to take inflation and trends into account.

The change was mostly caused by an upward revision to private inventory investment, which includes finished goods, materials, and works in progress that are being saved for later use. This means that investments in goods had less of a negative effect on GDP earlier this year.

The January through March period of GDP growth was below economists’ predictions and was slower than the prior quarter. Along with solid government spending, the first quarter’s growth was fueled by robust consumer spending, which makes up around two-thirds of total economic activity. During that time, businesses decreased their expenditures on equipment.

The economy appears to be holding up thus far. After two months of losses, retail sales increased in April, increasing by a seasonally adjusted 0.4% from the previous month. In April, employers created 253,000 new positions, a significant increase, and hourly wages increased by 0.5%.

According to preliminary survey data provided by S&P Global on Tuesday, private-sector business activity increased at a rapid rate in May, largely due to the services sector. Businesses that offer services reported greater demand, less difficulty finding employees, and increased optimism for commercial activity in the coming year. As a result of significantly reduced demand, firms in the US manufacturing sector saw another contraction in May.

The US economy continued to grow in May, but there is a growing duality, according to Chris Williamson, chief business economist at S&P Global Market Intelligence. “As consumers shift their spending from goods to services, manufacturers are struggling with overcrowded warehouses and a lack of new orders, while service sector companies are benefiting from a surge in post-pandemic demand, especially for travel and leisure.”

Consumer Spending Remains a Force

Consumers are likely to open their wallets for in-person experiences like travel and dining out in the next summer months, which will result in strong leisure spending. That might also support employment numbers in the leisure and hospitality sectors by implying strong business.
On Friday, the Commerce Department releases data for April on personal income, household spending, and the Fed’s favored inflation indicator.

According to Luke Tilley, chief economist of Wilmington Trust, “it looks like consumers are still in good shape and we attribute that to low debt levels, strong balance sheets in terms of high levels of savings, so we expect spending to stay positive in the second quarter.” “I believe that the economy will remain strong, and the labor market is the best indicator of this.”

However, later in the year, Federal Reserve experts predict a modest recession. The labor market must cool in order to lower inflation to the central bank’s 2% target, according to economists, including former Fed Chair Ben Bernanke.

It’s not yet clear how much the economy will be impacted by tighter lending criteria and the lag effects of monetary policy. According to the minutes from the Fed’s May policymaking meeting that were posted on Wednesday, officials at the Fed opined that those factors might have a more significant impact than expected.

The possibility that the gradual tightening of monetary policy could affect economic activity more than anticipated and that additional strains in the banking sector could prove more significant than anticipated were mentioned as sources of downside risk to economic activity, according to the minutes.