Why Was First Quarter GDP Growth Revised Down to 3.0%?

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First quarter GDP growth was a little less than we thought. It was revised down to an annualized rate of 3.0% from its initial estimate of 3.2%, according to the Bureau of Economic Analysis. This came as a surprise to economists. Even though GDP was revised downward, they expected the opposite -- for the second estimate to raise growth to 3.5%. What happened?

First, for those who like charts, here's some historical perspective of GDP:

gdp rev 2 2010-q1.PNG

Even with this slight revision, the first quarter remained the second highest quarterly growth rate we've seen since the recession began in late 2007.

The revision was caused almost entirely by the personal consumption expenditures portion, i.e. consumer spending. Even though this got a lot better in the first quarter, it didn't improve as much as originally thought. It was responsible for 2.42% of the 3.0% growth. The prior estimate reported a 2.55% contribution. That 0.13% difference is responsible for the vast majority of the 0.2% revised drop.

In particular, spending on services -- not on goods -- was overestimated. The services that consumers didn't use as much as thought were housing and utilities, and food services and accommodations.

Of course, 0.2% isn't much. But it is a little disappointing where most of this revision came from. Spending needs to drive the recovery to create jobs. It's also unfortunate that restaurants and travel was one of the most downwardly revised components; spending on these non-necessities is also an indicator that consumers are feeling much more comfortable opening their wallets. This component, and spending overall, still showed a healthy increase compared to 2009, but these revisions make their progress a little less impressive.

Also interesting to note, but not a source of the revision, was how trade estimates changed. Exports were revised up a bit. They increased by $27.3 billion instead of $22.0 billion. Meanwhile, however, imports were also revised up to a $47.6 billion increase from $41.0 billion in the initial estimate. So the net result is mostly a wash: the two revisions approximately cancel each other out. But it is good to see more exports than originally anticipated.

Finally, keep in mind that there's still another revision coming. Since downward revisions are more common than upward revisions, while there's a chance that we could return to the 3.2% original estimate, it's not too likely. But hopefully the final number won't sink below 3.0%.

Note: Data above is seasonally adjusted.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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