The government’s two main measures of US economic activity diverged in the first quarter, with one gauge painting a picture of weakness.
Gross domestic product rose at a revised 1.3% annualized pace in the first quarter, up slightly from the government’s previous estimate. However, a gauge of the income generated and costs incurred from producing goods and services — gross domestic income — decreased 2.3% after falling 3.3%, the worst back-to-back declines since the start of the pandemic.
| Metric | 1Q 2023 | 4Q 2022 |
|---|---|---|
| GDP | +1.3% | +2.6% |
| GDI | -2.3% | -3.3% |
| Avg. of GDP & GDI | -0.5% | -0.4% |
| Consumer spending | +3.8% | +1% |
The average of GDP and GDI showed contraction for a second-straight quarter. While that suggests the economic expansion is losing momentum under the weight of still-high inflation and tighter credit conditions, broad yet modest upward revisions to GDP components will continue fueling debate about the economy’s prospects.
American consumers continued to spend on the back of a strong labor market in the early months of the year. Consumer spending was revised higher to a 3.8% rate, according to Commerce Department figures published Thursday. Household spending on services was firmer than initially estimated, while outlays for merchandise were slightly weaker.
That said, the housing sector posted its eighth-straight quarterly decline and business investment in equipment shrank for a second quarter. The sharp downward revision to fourth-quarter GDI reflected much weaker wages and salaries than previously estimated.
“In theory, real GDP and real GDI should be equivalent, but they usually differ somewhat in practice due to data omissions,” Wells Fargo & Co. economists Jay Bryson and Shannon Seery said in a note. “This weakness in GDI suggests that real GDP growth in recent quarters may be revised lower in subsequent data releases.”
Durable household spending and persistent labor demand have led economists to push out their recession forecasts later into the year. The outlook relies largely on the jobs market, and separate data Thursday showed initial applications for unemployment insurance remain low.
The report also showed that adjusted pretax corporate profits fell in the first three months of 2023. Profits declined in the financial sector and at non-financial firms. From a year earlier, profits slid 2.8%.
Companies, however, continue to flex their pricing power. The personal consumption expenditures price index excluding food and energy — closely watched by Federal Reserve policymakers — was revised slightly higher to 5% in the first quarter.
After-tax profits as a share of gross value added for non-financial corporations, a measure of aggregate profit margins, remained well-elevated in the first quarter, at 13.8% after 14% in the prior quarter.
— By Reade Pickert (Bloomberg)
