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GDP Number Stinks, but Second Quarter Growth Is the Important Thing

NEW YORK (TheStreet) -- The headline number on gross domestic product today looks awful. The details aren't nearly as bad.

The Commerce Department said the economy shrank at a 1% annual rate between January and March, the weakest quarterly performance since early 2011 and much worse than the initial estimate of a 0.1% annualized first-quarter dip reported last month.

But the big reason for the change is a much bigger estimate of the amount by which companies reduced inventories. Instead of subtracting 0.57% from growth, as first believed, the new report says shrinking inventories trimmed 1.62% off of GDP.

Consumer spending was actually a bit better than first thought, rising 3.1%. So was private investment, which fell 1.6% instead of the 2.1% first reported. Federal spending was the same as in the first estimate, while state and local governments spent a little bit less. Net exports, which subtract from GDP, were a little more than expected.

Net it out, and inventories account for the entire change in the headline number.

So what does this mean? Very little. Economists still expect a sharp bounce-back in the second quarter, and blame the weather for the winter weakness. Moody's Analytics says second-quarter data released so far points to a 3.5% growth rate.

And the Federal Reserve has sent clear signals that it saw the economy improving by late April, when the Federal Open Market Committee met.

Consumer spending appears to be on a solid 3% annual growth trajectory, with services spending ramping up to match outlays for new cars, even as housing purchases plateau. With better employment growth expected, there's every reason for this to be sustained. A similar consumer-spending surge in 2010 fizzled out a few quarters later, but there is much less turmoil coming from Washington these days and the unemployment rate is likely to move below 6% this year, in contrast to a 2010 peak of 9.9%.

Businesses aren't spending big, but they're spending. Recent durable goods reports point to much more manufacturing activity in April and May -- with big double-digit year-over-year growth in unfilled orders in a number of industries. Housing sales reports, while not overwhelming, were fairly decent.

And government spending is at least not hurting growth as much as it was. Government spending cuts trimmed growth by 0.4% last year and just 0.15% in the first quarter, the Bureau of Economic Analysis says.

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