1st Quarter GDP Revised Substantially Lower, But 2nd Quarter Estimates See Strong Rebound

GDP expanded only +.6% annualized in the first quarter, the slowest pace since 2002. This was below expectations of +.8%, and less than half of the original advance estimate of +1.3% annualized. A widening trade deficit, inventory reductions, and a softer housing market all hurt growth in the first quarter. Recent reports are showing some rebounds in manufacturing and inventories, which are likely to help second quarter growth rebound to 2-3% annualized.

Personal consumption was revised higher to +4.4% annualized from +3.8% originally reported. As this represents about 70% of GDP, this improvement was the largest positive contributor for the change in GDP in the first quarter. Domestic demand grew more strongly than expected at +2.5% annualized, probably helped by declining gasoline prices during the quarter. Final sales were unrevised at +1.6%. Consumption is anticipated to slow notably in the second quarter as real wage gains slow and gasoline prices rise.

Other data included in today's revised GDP report includes a first look at corporate profits, which appear to be continuing to grow, but at a much slower pace of +1.2% QoQ. Year-over-year profit growth has fallen to +6.3%. Profit growth likely peaked in the third quarter of 2006 at 30.6% YoY. Income growth was revised higher in the fourth quarter, which was expected based on the strong tax income tax payment growth for 2006.

Digging into the fourth quarter preliminary data, we see that residential investment fell -15.4% annualized (previously estimated at -17%), but still a significant drag to growth. In contrast, non-residential investment grew a stronger +2.9% annualized (+2% previously), with the majority of the increase coming from structures at +5.1% annualized. Durable goods orders grew +8.8% annualized, non-durable goods rose +3.5% annualized, and services expanded +4% annualized - all three were revised higher from their advance estimates.

Exports fell -.6% annualized while imports rose +5.7% annualized in the first quarter. This was a notable reversal from the fourth quarter when exports grew +10.6% annualized and imports fell -2.6% annualized. National defense spending fell -7.3% annualized in the first quarter, after rising +12.3% annualized in the fourth quarter. Overall government expenditure growth held steady around +1% annualized.

Inventories saw a substantial revision, going from an increase of $14.8 billion in the advance estimate to a decline of -$4.5 billion in the newer preliminary estimate.

Price measures remained unchanged from the advance report, with the GDP price index holding steady at 4%, and core PCE at +2.2% QoQ.

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Initial claims were as expected at 310k (consensus 311k), with the four week average at 305k. Most economists are indicating the risk for tomorrow's payroll number is to see a higher than expected print. Many are looking for over 200k versus the consensus of +135k.