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  • Writer's pictureByron Gangnes

Quick Take: Big Upward GDP Revision

Updated: Jul 26, 2023

The third estimate of first quarter GDP was released this morning, showing a sharp upward revision to previous estimates, from 1.3% in the second revision to 2% in the third. GDP figures go through several rounds of revision because of delays in reporting and tabulating data. It is not unusual for the international trade categories in particular to see substantial revision because of reporting delays. However, the GDP revisions overall were larger than usual and larger than had been expected.

There were large upward revisions to the estimated growth of personal consumption of services and residential investment, which contracted somewhat less than indicated by earlier releases. The biggest revisions came in the international trade categories, where export were revised sharply higher and imports lower (the latter subtract from GDP, so this is also a "positive" revision). Revised downward were nonresidential fixed investment and personal consumption of goods.

table comparing 2nd and 3rd revisions to 23Q1 GDP

Because of their differing absolute sizes, the contributions of each category to GDP growth can be very different from their percentage changes. The modest-looking revision to personal consumer spending growth accounts for more than a third of the overall revision to GDP growth (0.27 percentage points of the overall 0.7 percentage point revision). While much smaller in size, the international trade categories represent an even bigger share of the upward revision. Because investment spending is a small category, its modest downward revisions barely register in the overall total.

What to make of these revisions? For one, they reaffirm the relative strength of the service sectors of the economy, compared with goods-producing sectors. The strength of services has prevented slowing of the economy but has been a concern of the Fed, since inflation has been persistent in this category. (The overall PCE Price index was revised downward very slightly.) Stronger exports may suggest overseas demand has held up better than many had thought. There have been a number of unexpectedly strong economic reports over the past week, and stock investors for one have rallied in response to optimism about business prospects. However, this might prove misplaced if the Fed decides that insufficient slowing requires more and larger interest rate hikes to cool inflation. We shall see.

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