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News > Jobs & Economy
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GDP growth rate revised up
But second look at 1Q gross domestic product comes in slightly below economists' estimates.
May 27, 2004: 11:57 AM EDT
By Andrew Stein, CNN/Money staff writer

NEW YORK (CNN/Money) - The U.S. economy grew faster than initial indications in the first quarter, the government reported Thursday, but the second look at gross domestic product came in below economists' estimates.

A revision of the first-quarter GDP growth came in at a 4.4 percent annual rate, up from an initial reading of 4.2 percent and below expectations of 4.5 percent growth, according to Briefing.com.

With the Federal Reserve expected to lift interest rates this summer, Thursday's revised GDP reading may influence the amount and timing of the hike.

The core price index for consumer spending -- a closely watched measure of inflation excluding volatile food and energy prices -- rose at an annual rate of 1.7 percent, down from an initial reading of 2 percent.

Following the more tame reading on inflation, bond prices pared early losses and equity futures moved little.

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At the Chicago Board of Trade, the July contract on Fed Funds futures indicated an 88 percent chance of a 25 basis point hike in interest rates at the end of June and a 12 percent chance for a 50 basis point hike.

That would put the overnight borrowing rate at 1.25 percent.

But bond watchers said the report may affect the central bank's moves months from now.

"Even if the economy slows, there will still be inflation," said Anthony Crescenzi, bond strategist with Miller Tabak & Co. "But there comes a point when the Fed won't pay attention to inflation because of a slowing economy."

The Commerce Department also said after-tax corporate profits rose 1.4 percent in the first quarter, compared with the fourth quarter. It was the weakest profit performance since the first quarter of last year, when earnings fell.

Corporate profits had widely been seen as a strong point in the economy with interest rates at 1 percent, encouraging businesses to borrow, produce more and take on more workers.

"Corporate profits will likely fall, but remain a large portion of GDP," said Conrad DeQuadros, senior economist with Bear Stearns. In Thursday's report, corporate profits made up about 12 percent of GDP.

DeQuadros added that he believes the Fed will stick to a gradual pace and lift interest rates by 25 basis points in June and in August. But in 2005, he believes inflation will rise above two percent and the central bank will move to some 50 basis point moves.

Major contributors to the growth in GDP were increases in personal consumption, hardware and software, government spending and exports, according to the government.  Top of page




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