Finance: GDP beats on stronger business and consumer spending

Consumer spending was a big drag on economic growth in the first quarter.

The US economy grew by 1.2% in the first quarter, better than initially reported, according to the Commerce Department's second estimate of GDP.

Economists had estimated that gross domestic product rose 0.9%, improved from the advance estimate of 0.7% that was based on incomplete data. Revisions will be released again in June and next July.

The big upward revision in the second estimate was made to company spending on real estate, machinery, and other long-term expenditures — so-called nonresidential fixed investment.

Consumer spending, the biggest part of the economy, was also revised higher. Personal consumption rose 0.6%, improved from the 0.3% pace in the first estimate. Core personal consumption expenditures, a measure of how much consumers spend on goods and services as opposed to how much they're saving for the future, was revised up to 2.1% from 2%.

Although growth was revised higher, its pace was still relatively slow. After the first estimate, economists were split on the extent to which the slowdown in growth was caused by weaker consumer spending or by residual seasonality — a statistical quirk that has distorted the real pace of first-quarter growth throughout this recovery.

For example, in minutes of the Federal Reserve's May meeting released on Wednesday, staff members judged that the weakness reflected soft consumer spending and inventory investment, not residual seasonality. However, Fed participants who decide on monetary policy thought seasonality at least played a role.

"Our GDP tracking model suggests that the weakness in Q1 2017 spending is attributable to components other than those that previously exhibited strong residual seasonality in the old vintage data," Nomura economists said in a note.

"More important, some hard data such as motor vehicle sales, energy output, and inventories came in on the weak side in recent months. Taking this development into account, we think that most of the recent weakness in the spending data reflects the underlying trend of the economy as opposed to technical measurement issues."

Growth is expected to rebound in the second quarter.

More to come ...

Consumer spending was a big drag on economic growth in the first quarter. Read Full Story