Growth Revised Down, Consumer Spending Higher, Job Market Healthy, Chicago PMI Surges, Construction Muted

- Preliminary 1Q GDP rose .6% versus estimates of .8% and prior estimates of 1.3%.

- Preliminary 1Q Personal Consumption rose 4.4% versus estimates of 4.1% and a 3.8% prior estimate.

- Preliminary 1Q GDP Price Index rose 4.0% versus estimates of 4.0% and a prior estimate of 4.0%.

- Preliminary 1Q Core PCE rose 2.2% versus estimates of 2.2% and prior estimates of 2.2%.

- Initial Jobless Claims for last week fell to 310K versus estimates of 314K and 314K the prior week.

- Continuing Claims fell to 2472K versus estimates of 2500K and 2524K prior.

- Chicago Purchasing Manager for May rose to 61.7 versus estimates of 54.0 and 52.9 the prior month.

- Construction Spending for April rose .1% versus estimates of unch. and an upwardly revised .6% increase the prior month.

BOTTOM LINE: The US economy grew at a slower pace than previously thought in the first quarter, Bloomberg reported. The Fed’s favorite inflation gauge, the core PCE index, rose at a 2.2% rate versus the 20-year average of 2.5%. The downward revision in growth was mainly the result of lower inventories than expected, which is a positive going forward. As well, personal spending was revised higher to 4.4%, the best rate in a year. Housing was less of a drag on growth than previously though, subtracting .9 percentage points from GDP. Moreover, personal income was revised higher for the fourth quarter of 2006, boosting the gain over the prior quarter to an annual rate of 5.9% from 4.7%. This is over twice most measures of inflation and suggests either payrolls have been undercounted or employees were paid more than estimated. I continue to believe US growth bottomed in 1Q as a result of dramatic inventory de-stocking and that growth is reaccelerating meaningfully this quarter and will approach average rates before year-end.

The number of Americans filing first-time claims for state unemployment benefits unexpectedly fell last week, pointing to strength in the labor market, Bloomberg reported. The four-week moving average of jobless claims rose slightly to 304,500. The unemployment rate among those eligible for benefits, which tracks the US unemployment rate, held steady at a historically low 1.9%. I continue to believe the job market will remain healthy over the intermediate-term without generating substantial unit labor cost increases.

A measure of US business activity jumped more than forecast in May, signaling expansion for the third consecutive month and suggesting the economy is accelerating after bottoming in the first quarter, Bloomberg reported. The Chicago PMI has now exceeded 60 during two out of the last three months. The long-term average is 55.0. Moreover, the New Orders component of the index soared to 71.1 from 56.5 the prior month. The Prices Paid component rose to 70.2 versus 64.9 the prior month. The Employment component of the index rose to 57.3 versus 50.5 the prior month. I continue to believe manufacturing which subtracted from US growth substantially during 1Q will add to growth this quarter as companies rebuild depleted inventories.

Spending on US construction projects unexpectedly improved last month, as work increased on non-residential projects such as hotels and factories, Bloomberg reported. Private homebuilding fell to the lowest level since June 2004. Non-residential construction rose 1.1% in April and is up 13% from the same time last year. I continue to believe overall construction activity will remain muted throughout the year as homebuilders continue to work down inventories.