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GDP Rises 5.6%

First-quarter real GDP growth was revised downward to a 5.6% annual rate from the 5.8% in the advance report. The consensus expected an upward revision to 5.9%. Although the difference is well within the normal error, the direction is a surprise.

Inventories were revised upward, to $25.7 billion, but that was offset by a downward revision of capital spending, as business fixed investment was revised to show an 8.2% drop, compared with 5.7% decline in the preliminary report. Consumer spending was revised lower to 3.2% growth from 3.5%, while defense spending was revised to 18.3% growth from 19.6%. And both imports and exports were revised downward.

Corporate profits adjusted for changes in inventory valuation and capital consumption adjustment were up 4.6% from a year ago, but after-tax profits dropped 17.3%. The difference is caused by the change in depreciation rules under the tax law passed last June.

We at S&P now expect 4% growth in the second quarter, with inventories supplying less growth. The Fed will remain concerned about weakening growth after the inventory bounce. We still expect no tightening until August.

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