US GDP Revised Lower, but Corporate Profits Higher
The final revision to Q1 US GDP was disappointing in the headline and composition. It is mitigated on the margins, for investors, by the substantial upward revision in corporate profits.
Growth was revised to 2.7% from 3.0% previously and 3.2% advance reading. Consumption was cut to 3.0% from 3.5%. Equipment and software spending was revised to 11.4% from 12.7%. Net exports were a 0.82% drag rather than 0.66%. Blunting this was news that inventories contributed 1.87 percentage points, a little more than the 1.58% previously estimated.
This combination of less consumption and investment and higher inventories plays on fears of the fragility of the recovery. The composition may encourage some economists to revise lower the US growth path.
Meanwhile corporate profits were revised higher to 8.0% from 5.5%, which is the same as in Q4. Corporate income taxes also rose and the increased government revenue is one the reasons why the size of the monthly Treasury auctions have been reduced slightly. On an after tax basis, corporate profits rose by 5% rather than the early estimate of 2.1%.
The market’s reaction was mixed; initially taking the dollar higher on new concerns about the strength of the world economy, but euro and sterling buying was seen on the pullback.