The unexpected downward revision to first-quarter GDP growth in the U.S. raises more questions about the health of the so-called economic recovery.

The Commerce Department reported this morning that the nation's economy grew at a 2.7% rate, below the prior 3.0% estimate, following a spate of other uninspiring data on consumer spending, retail sales and unemployment.

“The modest downward revision... leaves the current economic recovery looking even less impressive compared with previous ones,” said Paul Dales, U.S. economist at Capital Economics.
“What's more, growth is set to slow in the second half of this year and into 2011.”

The economy grew by 5.6% in the fourth quarter of 2009.

The downward GDP revision in the first quarter, Dales indicated, was due to slower consumption growth than previously estimated (3.0% vs 3.5%) and a larger drag from net trade (0.8% vs 0.7%), which more than offset faster investment growth (16.3% vs 14.7%) and a larger positive contribution from inventories (1.9% vs 1.7%).

“Slower consumption growth suggests that the recovery is built on less sustainable foundations than previously thought,” he noted. “Admittedly, GDP growth is likely to have been better in the second quarter, perhaps coming in towards the top end of the 3%-4% range. But that won't be sustained for long. Growth will soon slow as the rebound in world trade fades, inventory rebuilding slows and the size of the fiscal injection shrinks.”

A report in Action Economics (AE) also stated that the downside surprise was mostly seen in service consumption, “though we also saw some trimming of equipment spending.”

Despite the lower first quarter numbers, AE said it will continue to assume a 3.6% growth rate for second-quarter GDP growth “until we have time to review next Monday's personal income report, though the risks for the second quarter figures now sits to the downside if the weaker service-sector trajectory is extended through the April and May figures to be released on Monday.”

In addition, the winding down of fiscal stimulus from 2010 to 2011 on its own is worth 2% of GDP, Dales estimates.

“Overall, the US economy may be performing much better than those in Europe, but this is still the weakest and longest economic recovery in US post-war history. No wonder the equity market is struggling to move up and bond yields remain fairly close to 3%.”

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