According to today's release, GDP increased at an annual rate of 2.2 percent in the first quarter of 1996. This compares with an annualized rise of 0.5 percent in the fourth quarter of last year. The first quarter increase was mainly due to large increases in personal consumption expenditures and nonresidential fixed investment. These gains were offset in part by an increase in imports and a decrease in the change in business inventories.

Personal consumption expenditures increased by 3.6 percent in the first quarter, compared to an increase of just 1.2 percent in the fourth quarter. Nonresidential fixed investment increased by 12.4 percent vs. 3.1 percent. Residential fixed investment increased 7.4 percent, a little more than the fourth quarter increase of 6.4 percent. Exports increased by just 2.0 percent; but, imports jumped by 10.2 percent. Federal government expenditures rose by 5.8 percent and state and local goverment spending fell by 0.9 percent. The change in business inventories subtracted $18.6 billion from first quarter real GDP.

Take a look at Economic Indicators for 10/24/95, Slicing Up The GDP Pie, for a review of how all these factors contribute to the final value for the GDP.

The change in the price index for gross domestic purchases, an indicator of inflation, was +2.4 percent during the first quarter. This was up from +2.1 percent in the fourth quarter. The larger first-quarter gain was attributable to the temporary rise in energy prices.

Today's release also reported on the Commerce Department's revised estimate of corporate profits for the first quarter. First-quarter after-tax profits rose by 5.9 percent. This compares quite favorably with gains last year of 1.9 percent and 2.9 percent in the fourth and third quarters, and a loss of 0.7 percent in the second quarter.

Summing up: Today's report shows moderate economic growth with modest inflation and the best gain in after-tax corporate profits in the past year. What more could an investor hope for?

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The final estimate of the University of Michigan's consumer sentiment index for June became available today. The index was revised down to 92.4 from an earlier estimate of 93.8. This was higher than May's figure of 89.4; but, a few tenths lower than the 92.7 reading registered in April. This lowered Merlin's composite sentiment index (the average of the Conference Board and U of M numbers) from 95.5 to 95.0, the second consecutive lower reading since a high of 99 in April.

More important than the sentiment index, is the U of M consumer expections index which was also released today. The expectations index is one of eleven indicators that are combined together to form the Department of Commerce Composite Index of Leading Economic Indicators (LEI). Today's report revised the May reading down from 80.5 to 79.2 and the June reading down from 86.9 to 84.0. The revisions didn't alter the directions of the April-to-May or May-to-June changes in the index. So, the revisions should not materially change the contribution of the expectations index to the LEI in the past couple months.

Byline: Lafferty (MF Merlin)