US First-Quarter Growth Revised Up to 2.1 Percent as May Inflation Accelerates and Factory Orders and Home Sales Soften
The world’s largest economy delivered a split picture this week, with its first-quarter growth revised firmly higher and its preferred inflation gauge accelerating in May, even as fresh figures pointed to softer demand for big-ticket manufactured goods and new homes. Taken together, the data suggest an economy that grew more solidly early in the year than first thought, with inflation reaccelerating and consumer spending holding up, but with parts of the economy cooling as that momentum carries into the second quarter unevenly.
Growth revised up, but inflation stays sticky
US gross domestic product expanded at an annual rate of 2.1 percent in the first quarter, according to the third estimate from the Bureau of Economic Analysis released on 25 June. That marked an upward revision of half a percentage point from the second estimate of 1.6 percent, and also topped the initial advance reading of 2.0 percent, leaving the quarter’s growth path running 2.0 to 1.6 to 2.1 percent across the three estimates. The BEA labels this the third estimate rather than a final number, since later annual revisions can still adjust it.
The upgrade was driven mainly by a downward revision to imports, which subtract from GDP and therefore lifted the headline when revised lower, partly offset by softer consumer spending, where outlays on financial services, insurance and international travel were marked down. A cleaner gauge of underlying domestic demand, real final sales to private domestic purchasers, was revised down to 1.7 percent from 2.4 percent in the previous estimate, a reminder that the headline strength owed something to trade math rather than to firmer household demand. On inflation within the GDP report, the core personal consumption expenditures price index, which excludes food and energy and is the Fed’s preferred measure, held at 4.4 percent for the quarter, while the broader PCE price index was 4.6 percent, both well above the 2 percent target and underscoring why the central bank has been cautious on cutting rates.
May inflation reaccelerates as spending holds up
Fresher monthly data confirmed that price pressures are firming again. In the Bureau of Economic Analysis personal income and outlays report, the PCE price index rose 0.4 percent in May from April and 4.1 percent from a year earlier, the fastest annual pace in about three years. Core PCE, which strips out food and energy, rose 0.3 percent on the month and 3.4 percent over the year. These monthly readings, unlike the 4.4 percent quarterly core figure embedded in the first-quarter GDP report, capture the most recent trend, and the year-on-year pickup points to renewed momentum in prices rather than continued disinflation.
Crucially, the acceleration came alongside firmer demand rather than weaker. Personal income rose 0.7 percent in May and current-dollar consumer spending also increased 0.7 percent, led by a 94.3 billion dollar rise in services outlays and a 61.8 billion dollar rise in goods, while real spending adjusted for prices rose 0.3 percent. The personal saving rate held at 3.0 percent. The combination of accelerating prices and resilient spending makes the path to near-term rate cuts harder to justify, although the president of the New York Federal Reserve has signaled he expects price pressures to ease over time.
Factory orders fall on aircraft, but core capex holds up
Orders for US durable goods fell 4.5 percent in May to about 332.1 billion dollars, according to the Census Bureau’s advance report, a sharp swing after a strong April that was revised up to an 8.5 percent gain. The headline drop was concentrated in transportation, where orders slumped 14.0 percent as commercial aircraft bookings gave back the prior month’s surge, a notoriously volatile category. Stripping out transportation, orders actually rose 1.3 percent, and core capital goods orders excluding defense and aircraft, a closely watched proxy for business investment, increased 1.6 percent. The detail therefore points to firmer underlying investment intentions than the headline decline implies.
New home sales drop as supply builds
Sales of new single-family homes fell 7.3 percent in May to a seasonally adjusted annual rate of 580,000 units, down from a revised 626,000 in April and 6.8 percent below a year earlier, with the supply of new homes on the market rising to 10.3 months from 9.3 months in April. A supply reading above ten months signals a softening market in which inventory is accumulating faster than buyers are absorbing it, consistent with the drag from elevated mortgage rates on housing demand. The median sales price was 424,900 dollars, up 2.0 percent from April and virtually unchanged from a year earlier, indicating that prices are holding even as sales volumes cool.
Labor market still resilient
The labor market remained resilient. Initial claims for unemployment benefits fell 12,000 to 215,000 in the week ended 20 June, and the four-week moving average, which smooths weekly noise, was little changed at about 224,250. Continuing claims rose to about 1.82 million, a sign that while layoffs stay low, some unemployed workers are taking longer to find new jobs. The low level of new claims indicates employers are still holding on to staff, a key support for consumer spending even as other indicators cool.
Why it matters
For markets across MENA and globally, the combination matters most through the Federal Reserve and the dollar. Firmer first-quarter growth alongside May core inflation at 3.4 percent and headline PCE at a roughly three-year high of 4.1 percent, with spending still rising, gives the Fed little reason to rush rate cuts, which tends to support the dollar and US yields, a dynamic that feeds directly into the region’s currency pegs, import bills and external financing costs. At the same time, the softer May readings on factory orders and housing hint at cooling momentum that, if it broadens, would eventually argue for easier policy. For the Gulf energy exporters, the resilience of US demand is a supportive signal for oil consumption, while for import dependent MENA economies the path of the dollar and US rates remains the more immediate channel.
Outlook
The focus now shifts to whether the softer May data mark the start of a second-quarter slowdown or a one-month wobble, to the next core PCE and payrolls readings for the inflation and labor trajectory, and to how the Federal Reserve weighs sticky inflation against early signs of cooling demand at its upcoming meeting.
Sources: US Bureau of Economic Analysis; US Census Bureau; US Department of Housing and Urban Development; US Department of Labor.
