US first-quarter GDP revised up, Brexit risk to outlook

Reuters: US economic growth slowed in the first quarter but not as sharply as previously estimated, and while there are signs of a pickup in the second quarter, analysts worry Britain’s vote to leave the European Union could hurt activity later this year.

Gross domestic product increased at a 1.1% annual rate, rather than the 0.8% pace reported last month, the Commerce Department said on Tuesday in its third GDP estimate. The economy grew at a rate of 1.4% in the fourth quarter.

There are indications the economy has regained momentum in the second quarter, with retail sales and home sales rising in April and May, although business spending remains weak and job growth has slowed. But uncertainty following last Thursday’s so-called “Brexit” referendum poses a risk to the growth outlook.

“The test comes in the next few months as the turbulence in financial markets may affect consumers’ behaviour and also weigh on business investment,” said Ryan Sweet, senior economist at Moody’s Analytics in West Chester, Pennsylvania.

“If financial markets settle down, the effect of the British referendum on the US economy will be very small.”

Brexit wiped off $ 3.01 trillion from global stock markets over two days. On Tuesday, global equities recouped some losses, with financial shares leading the rebound. US stock indexes rallied, while prices for government debt fell. The dollar fell against a basket of currencies.

Economists estimate that Brexit could subtract an average of two-tenths of a percentage point from US growth over the next six quarters, with most of the drag coming through weak business spending as uncertainty causes companies to either delay or scale back capital projects.

“Following the Brexit vote, we expect a stronger US dollar and heightened financial market strains will weigh on domestic activity, but lower interest rates should provide some offset so that the net impact is a marginal negative,” said Gregory Daco, head of US macroeconomics at Oxford Economics in New York.

Despite signs growth is gaining steam, economists say the Federal Reserve is unlikely to raise interest rates in the near-term, given the uncertainty over the implications of Brexit.

Fed Chair Janet Yellen told lawmakers last week that data pointed to “a noticeable step-up” in GDP growth in the second quarter. The Atlanta Federal Reserve is currently estimating second-quarter GDP rising at a 2.6% rate.

When measured from the income side, the economy grew at a 2.9% rate in the first quarter, the quickest pace since the third quarter of 2014.

That was up from the 2.2% pace reported last month and reflected upward revisions to corporate profits. After-tax profits increased at a 2.2% rate in the first quarter, rather than the previously reported 0.6% pace.

Dollar, oil constraint

Economic growth in the first quarter was constrained by dollar strength and sluggish global demand. Output was also hampered by business efforts to reduce an inventory overhang, with a further drag coming from lower oil prices, which have unleashed deep spending cuts on capital goods such as equipment.

There are indications that the model used by the government to strip out seasonal patterns from data is not fully accomplishing its goal. The economy has underperformed in the first quarter in five of the last six years.