U.S. GDP Expands Much Less Than Expected In First Quarter As Business Investment Slumps

The U.S. economy expanded at a much slower rate than previously thought in the first quarter, the latest and final revision to the report showed Wednesday. The economy expanded at a mere 1.8 percent in the first quarter, below the previous estimate of 2.4 percent which was expected to remain unchanged.

Weak Internals

Some key internals of the GDP report were weak in the first quarter report. Business investment increased a mere 0.4 percent in the first quarter after being estimated to have risen 2.2 percent in the May estimate, also posting a large decline from the fourth quarter's gain of 13.2 percent. Questions surrounding corporate confidence on the sequester and the fiscal cliff could have weighed on investment in the fourth quarter.

Personal consumption rose 2.6 percent in the first quarter, below the prior estimated rate of 3.4 percent though still faster than the fourth quarter when consumption rose only 1.8 percent. Final sales were also weak in the quarter as real final sales were revised lower to 1.2 percent from 1.8 percent previously after rising 1.9 percent in the fourth quarter.

Inventory Boost

Inventory gains in the first quarter boosted the quarter, as the real final sales (GDP less inventories) number shows. Inventories grew 0.57 percent in the quarter after declining 1.52 percent in the fourth quarter. Inventory drawdowns actually show that the fourth quarter was exceptionally strong given the inventory drawdown.

"The acceleration in real GDP in the first quarter primarily reflected an upturn in private inventory investment, an acceleration in PCE, and smaller decreases in federal government spending and in exports that were partly offset by a deceleration in nonresidential fixed investment and a smaller decrease in imports."

Market Impact

S&P 500 futures were largely unchanged after the weak report as the weak data signals that the Fed is going nowhere anytime soon. S&P futures fell slightly to 1,590.25, still up sharply on the session and from Monday's lows. The Dollar Index eased off of highs and fell back below 83 while gold bounced off of 34-month lows to $1,242.32 per ounce.