US economic growth expanded much faster in the first quarter than previously estimated

By Bryan Mena, CNN

Washington, DC (CNN) — The US economy expanded at a much faster pace in the first three months of the year than previously estimated, the Commerce Department reported on Thursday.

Gross domestic product, the broadest measure of economic output, rose by an annualized rate of 2% in the first quarter, up from the second estimate of 1.3%. That was also well above economists’ expectations of 1.4% rate, according to Refinitiv.

The department’s final estimate of first-quarter GDP reflected an upward revision to exports, consumer spending, state and local government spending, and investment from housing businesses, such as landlords.

The new data showed that Americans spent more on services and less on goods, including a jump in spending on health care services. Consumer spending, which accounts for about two-thirds of economic output, was revised to 4.2% from 3.8%. The latest estimate incorporated data from the Commerce Department’s Quarterly Services Survey.

The revised trade flows contributed positively to GDP, with exports rising more than previously estimated while imports were revised down. First-quarter exports were revised to 7.8% from 5.2%. Residential fixed investment — spending from housing businesses or landlords — had less of a drag on GDP. Nonresidential businesses cut back more than previously reported, specifically more on equipment purchases.

Stocks rose as investors cheered the surprising vigor reflected in the third estimate, but later pared back their gains. Markets usually shrug off GDP revisions, except when they are this large.

The final first-quarter GDP estimate shows that the US economy was in much better shape than previously thought, thanks to resilient US consumers, though economists say that momentum has slowed in recent months.

“While consumers are still spending, they are exercising more discretion as lingering inflation and the Federal Reserve’s tightening cycle take their toll,” wrote Gregory Daco, chief economist at Ernst & Young, in an analyst note. “We still believe a recession is more likely than not, but we have lowered our recession odds to 55%, and if it were to materialize it would have unique characteristics.”

The Fed kept its key federal funds rate steady at a range of 5-5.25% earlier this month, though most officials expect to hike rates two more times this year to successfully tamp down any lingering inflationary pressures. Signs of a stronger economy might mean more rate hikes, since the officials have made it clear they’re not done battling inflation.

“The strong 2% GDP number gives the Fed more leeway for increasing the fed funds rate without pushing the economy into a recession,” said José Torres, senior economist at Interactive Brokers. “A strong PCE number tomorrow, furthermore, could reinforce expectations of higher inflation and the Fed becoming even more aggressive with the fed funds rate and for an even longer period of time than anticipated.”

The Commerce Department releases the May reading of the Fed’s preferred inflation gauge on Friday, which will be closely watched by Fed officials for their interest-rate decision in July.

Yet, that’s on the backdrop of banks toughening their lending standards, inflation still hovering above the Fed’s 2% target, student loan payments restarting later this year, and the labor market steadily cooling. Consumers are facing a challenging economic landscape in the future, but many economists, in addition to Fed Chair Jerome Powell, have lauded the resilience of the US economy.

And consumers might spend a bit more as the still try to recoup lost time or secure purchases they previously weren’t able to.

“Consumers who still have discretionary dollars to put to use are still spending them either on on new autos, which weren’t available in the last two years because of the chip shortage, or spending them on services, the face-to-face economy where a lot of plans got derailed by the pandemic,” Bill Adams, chief economist at Comerica Bank, told CNN.

CNN’s Krystal Hur contributed to this report.

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