Real GDP was revised down from an initial read of 2.2% to 1.9% in the first quarter of 2012. The biggest downside revisions occurred in the public sector, as what were initially reported as gains in the state and local sectors are now reported as losses. This throws some cold water on the view that state and local governments have already bitten the bullet and are now likely to add to, rather than subtract from, growth in 2012. Federal government spending also declined in response to a winding down of the war in Iraq and the drop in defense spending.
The read on real GDP also underscores the view that growth at the end of 2011 was more reflective of catch-up, or inventory rebuilding, than a pickup in fundamental demand. Consumers spent more in the first quarter in response to that unusually warm winter weather and the jobs that accompanied it; those gains are now playing out.
Bottom Line: Preliminary estimates for the second quarter suggest that the economy could print something north of 2%, which would mark acceleration over the first quarter. Those gains will be difficult to maintain, however, if employment continues to weaken as we move into the summer. I am still looking for about 2-1/4% growth this year. That was considered conservative just a few weeks ago; it could soon be considered optimistic.