The second estimate of first-quarter GDP growth was unchanged at 0.3% (0.31% versus a preliminary 0.30% before rounding). Monthly output, however, rose by more during the course of the quarter than previously assumed, supporting the view here that GDP could post an outsized second-quarter increase.
Specifically, monthly GDP – based on output data for services, industry and construction, together accounting for 99.4% of GDP – grew by 0.1%, 0.7% and 0.2% in January, February and March respectively. The March reading was 0.35% above the first-quarter average – GDP will rise by this amount in the second quarter even if monthly output is static at the March level. Earlier data suggested a smaller carry-over effect of 0.25%.
As previously discussed, second-quarter GDP may also benefit from a rebound in construction output from weather-related weakness. A return to fourth-quarter activity – consistent with a rise during the second half of 2012 in construction new orders, which lead output – would boost GDP by about 0.3% relative to the March level. The combination of the carry-over and construction effects, in other words, could produce a 0.65% second-quarter GDP gain, before allowing for possible further growth in the rest of the economy.
The first-quarter GDP revision was accompanied by a first estimate of the GDP deflator (i.e. prices), which rose by a surprisingly strong 1.6%. Quarterly deflator changes are volatile but it is noteworthy that annual growth in current-price GDP jumped from 1.5% in the fourth quarter to 3.4% – the strongest since the third quarter of 2011.
A monetarist view is that this pick-up is being driven by an earlier recovery in broad money growth – annual expansion of M4 excluding money holdings of financial corporations has been moving up since the third quarter of 2011. The money supply typically leads economic activity by about six months and prices by about two years, suggesting an impact on current-price GDP after approximately 15 months. The rise in current-price GDP expansion in early 2013, in other words, is consistent with the late 2011 increase in money growth, which was sustained during 2012.
