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1Q U.S. GDP revised down

June 29, 2001 Posted: 1656 GMT

NEW YORK (CNNfn) -- The U.S. economy grew at a slightly slower pace in the first quarter than previously thought, the government reported Friday, though consumer spending helped the economy weather a drastic decline in corporate profits.

U.S. gross domestic product (GDP) the broadest measure of the nation's economy grew at a 1.2 percent annual rate in the quarter, the Commerce Department reported. Economists surveyed by Briefing.com expected a revised 1.3 percent growth rate.

Friday's number was the government's final report of first-quarter GDP. Last month, it estimated GDP grew at a 1.3 percent rate in the quarter.

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U.S. stocks showed little reaction to the data, while U.S. Treasury bond prices fell. Most economists yawned at the data, as well.

"It's old news and pretty inconsequential changes," said Jim O'Sullivan, senior economist at UBS Warburg.

The report comes two days after the Federal Reserve cut interest rates for the sixth time this year in a bid to keep the United States from slipping into recession.

The report echoed many of the issues the Fed has cited as it made cuts this year corporate profits are down, the U.S. trade gap is growing, but consumers are still spending.

Click here for CNNfn.com's economic calendar

"Granted, it feels bad, but that's mainly because we had it so good," said Bill Cheney, chief economist at John Hancock Financial Services. "In reality, we still have positive growth, low unemployment (even if it rising), and low inflation. Maybe that's why consumer confidence is holding up."

Underscoring the strength of consumer confidence, the University of Michigan's final June consumer sentiment index, which measures consumers' attitudes about the economy, rose to 92.6 in June from 92.0 in May, according to a Reuters report.

The June reading was far above the recent trough of 90.6 scored in February, its lowest in nearly five years, Reuters said. The preliminary June reading, released mid-month, was 91.6, according to the report.

Corporate profits shrink

In its GDP report, the Commerce Department said corporate after-tax profits shrank at a 6.2 percent rate, or by $39 billion a year, revised sharply upward from the estimate a month ago of a 3.1 percent decline. It was the steepest drop in profits since the first three months of 1998, when a financial crisis swept through Asia and hurt U.S. companies' overseas business, the report said.

"It underscores how much profits have been squeezed and helps explain why business investment is weakening as much as it is in the second quarter," O'Sullivan said.

Meanwhile, consumer spending growth was revised sharply up, to a 3.4 percent rate from 2.8 percent. That strength, which lifted the overall GDP number significantly, was undermined by a downward revision of exported goods and services.

Chicago manufacturing strengthens

But a separate report offered a hint of hope for the manufacturing sector, which has been hardest hit by the economic slowdown. The Chicago Purchasing Managers Index, a measure of manufacturing activity in Chicago, rose to 44.4 percent in June from 38.7 percent in May, according to the National Association of Purchasing Management (NAPM).

"This rise could indicate the worst is over," the NAPM said.

A reading above 50 percent indicates manufacturing activity is expanding, while a reading below 50 indicates contraction. Economists polled by Briefing.com expected the index to rise only to 39 percent.

"Manufacturers are still miserable, and output will keep falling for some time, but they can now see light at the end of the tunnel," said Ian Shepherdson, chief U.S. economist with High Frequency Economics Ltd. "They are working off their excess inventory ... and are now hopeful of stronger orders by the year-end."