Government Revises GDP Estimate Slightly Downward

The government reports that the economy is growing slightly slower than previously thought.

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While there are plenty of bright spots in the economy, there is reason to believe growth will once again slow down.

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U.S. economic output grew at an annual rate of 2.4 percent in the first quarter, the Commerce Department reported Thursday. The reading is the department's second estimate of GDP for the first quarter and represents a slight decline from the initial estimate of 2.5 percent.

The government revises its GDP estimates as new information on growth comes in. The Commerce Department reported that the initial first-quarter GDP report had overestimated private inventory investment, exports and imports. However, the department also reported that "the general picture of overall economic activity is not greatly changed."

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Though the department revised growth slightly downward, the 2.4 percent growth figure still represents a sharp acceleration from the fourth quarter, when output grew by 0.4 percent. That acceleration was driven by businesses boosting their inventories, increased consumer spending, a smaller drop in government spending and increased exports.

While there are plenty of bright spots in the economy, there is reason to believe growth will once again slow down.

"The rise in home prices and improvement in consumer confidence is encouraging and should support continued gains in consumer spending," says James Marple, senior economist at TD Economics. "However, it has not changed our expectation for real GDP growth to decelerate to below 2.0 percent in the second quarter."

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The first quarter growth is a sharp improvement from the prior quarter, but cuts from sequestration and the January expiration of the payroll tax cut could still wreak economic havoc. In February, the Congressional Budget Office estimated that real GDP would grow by just 1.4 percent over the course of 2013, slowed by the automatic cuts to federal spending and tax increases. Meanwhile, the Federal Reserve's Open Market Committee members estimated in March that 2013 GDP growth would likely fall between 2.3 to 2.8 percent.

In addition, 2.4 percent growth is uninspiring, compared to where the economy could be. The Congressional Budget Office has also estimated that GDP in the fourth quarter of 2012 was 5.5 percent lower than its potential level and predicted a gap between real and potential GDP until 2017.

The Commerce Department will release its third revision of first-quarter growth on June 26.

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