Via Millan Mulraine at TDSecurities:
The second estimate of US Q1 GDP performance offered an unflattering view on economic growth performance earlier this year, with the economy contracting at a 0.7% q/q pace compared to the earlier +0.2% q/q estimate. This, however, was a slightly slower pace of contraction than the market expectation for a 0.9% m/m decline. The lower estimate was due to the bigger than expected drag from net trade activity, which subtracted 1.9ppt from growth compared to the 1.25ppt drag estimated earlier, reflecting a bigger impact from the strong dollar and weak global backdrop than previously thought. The trade numbers are also likely to incorporate some impact from the West Coast port shutdown, which should eventually unwind during the next quarter. A slower inventory build also contributed to the downgrade in growth, with the contribution to growth from inventory falling from +0.74ppt to 0.33ppt. This, however, is likely to be a net positive for Q2 GDP accounting as it will mean a smaller drag from inventory draw down. Consumption activity was also lower on the month, with its estimated contribution falling from +1.31ppt to +1.23ppt.
On net, the downward revisions to Q1 GDP was broadly as expected and it suggested that the US economy was in far weaker shape that the earlier estimate indicated. Nevertheless, given that much of the downward revisions were driven by weaker trade and a smaller inventory build, we interpret this mix of revisions as a net positive for Q2 GDP accounting, though we continue to expect the rebound in GDP growth in Q2 to remains subdued, somewhere in the 2.0% to 2.5% range. We will get a better sense on this when the April personal spending report is released on Monday.