Revised Data Confirms Sharp Acceleration of U.S. Growth in Q1

Good News Hat-Trick

The final report on GDP growth for the first quarter of the year, with its revised data, has just been released.

• Real GDP growth for the first quarter of 2006 was revised up from a preliminary estimate of 5.3% to a final estimate of 5.6%.
• The upward revision to GDP mainly reflected a downward revision to imports, which grew at a real rate of 10.7%, compared with a previously reported 12.8%.
• The GDP deflator, which is a broad measure of price pressures, was revised down from 3.3% to 3.1%.
• The personal consumption deflator, both top-level and core, moved up by 2.0% (unchanged from the preliminary estimate, and down from 2.4% in the fourth quarter of 2005).

GDP advanced at a rate of 5.6% in the first quarter of 2006, a sharp acceleration from 1.7% in the fourth quarter of 2005. Taken together, the two quarters generated very solid growth averaging about 3.6%. The upward revision to first-quarter GDP was connected with a downward revision to real imports, which in and of itself is a positive development in view of the sharp acceleration in domestic demand, from 1.1% in the fourth quarter of 2005 to 5.8% in the first quarter of 2006. Taken in this light, the real import growth picture in the first quarter was surprisingly tame.

The second positive aspect of this final GDP report for the first quarter was a downward revision to the GDP deflator, which is the broadest measure of price pressures in the economy. This deflator was revised down from 3.3% to 3.1%, primarily due to a downward revision to estimates of gains in house prices, as well as downward adjustments to measures of state- and local-employee health-insurance costs. The core deflator for personal consumption advanced at a rate of 2.0% in the first quarter (unchanged from the preliminary report), down from 2.4% in the fourth quarter of 2005.

The third element of good news in this report was a substantial upward revision to first-quarter corporate profits. Corporate profits with inventory valuation and capital consumption adjustments were revised up from a preliminary estimate of US$116.5 billion, to a final estimate of US$176.7 billion. On a year-on-year (y/y) basis, corporate profits were up by 28.5% in the first quarter of 2006. Corporations are managing to produce double-digit gains in profits despite considerable pressures from very steep increases in materials costs. This is the result of a combination of higher product pricing and the continuation of strong productivity growth in the first quarter.

Outlook and Implications

Global Insight is forecasting that real growth will experience a fairly sharp slowdown in the second quarter, to about 2.7%, as consumers are expected to pull in their horns on big-ticket items due to much higher gasoline (petrol) prices and higher borrowing costs. The first-quarter revision to GDP figures does, however, also support the view that corporate profits have good momentum going into the second quarter, and this is expected to sustain business investment demand for both equipment and structures even as real consumption spending slows down in the second quarter and the second half of the year.