Growth Shock: U.S. Economy Grew at Much Faster Rate In First Quarter Than Previously Thought

The U.S. economy’s growth rate for the first three months of the year was revised up sharply on Thursday as official data indicated that gross domestic product rose at an annualized rate of two percent.

The third estimate of GDP for the first quarter of 2023 shows the economy grew at a two percent rate, up from the previous estimate of 1.3 percent. Economists had forecast a much milder upward revision to 1.4 percent.

Consumer spending was stronger than previously estimated and exports were higher. Imports, which subtract from the calculation of GDP, were revised down. There were also downward revisions in nonresidential fixed investment and federal government spending.

Before adjusting for inflation, the economy grew at a 6.1 percent rate, a sharp upward revision from the 5.4 percent rate in the previous estimate. The personal consumption expenditure price index was revised down a tenth of a point to show prices rising at a 4.2 percent rate. Core PCE prices, which exclude food and energy, rose at a 4.9 percent rate, down from the previous estimate of five percent.

The revisions show the economy began the year on a much stronger footing than expected, defying forecasts that the economy was verging on a recession. Last year, the Fed embarked on a series of interest rate hikes that drove the federal funds rate up at the fastest pace in decades. A strong labor market, however, has buoyed consumer spending and kept the economy growing at a much faster pace than expected.

Fed officials have said that they believe the economy will have to grow at a slower than 1.8 percent rate—which they consider the long-term growth trend for the U.S. economy—for some time in order to bring inflation down to their two percent target.

The faster growth rate will likely support the Fed’s plan to continue to raise rates this year and may provide ammunition to officials who believe the Fed will have to raise rates even more than the fifty basis points indicated in recent Fed projections.