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By Jason Stipp and Robert Johnson, CFA | 06-26-2013 12:00 PM

Johnson: Softer 1Q Doesn't Change My View

Although the third read on first-quarter GDP came in lighter than expected, Morningstar's Bob Johnson is sticking with 2%-2.25% full-year GDP estimate.

Jason Stipp: I'm Jason Stipp for Morningstar.

The market shrugged off a soft third read of first-quarter GDP; that came in at 1.8% instead of an expected 2.4%.

What does this mean to Bob Johnson, our director of economic analysis, and for his forecast for the full-year GDP? He is here to talk about the numbers and his expectations.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: We did get a third [read] of the first-quarter GDP. It was a lot softer than economists had expected at 1.8% versus 2.4%. That seems soft to me. What's your read on that?

Johnson: It is kind of unusual for the third read of a GDP to be this much off the original. Usually the second revision is the biggest one. So, I was a little bit surprised at the magnitude of the number. So it did surprise me, absolutely, but it gives us a smaller base to work from in the quarters ahead. But nevertheless, the number was disappointing, and it seems to indicate that the first quarter was a little softer, and the payroll tax had a bigger impact than people thought.

In a lot of the more discretionary items, things that people might immediately grab at in a hurry to cut expenses--namely, restaurant spending is certainly one of those categories, and travel spending is another, where [consumers] cut back a little bit. The other one that's interesting is health care, which got cut back a little bit. We're still seeing the cost curve and the usage are still getting bent downwards in that, and that's been a big part of the deficit decrease estimates.

Stipp: So you're talking about some of the culprits there, but these roll up, obviously, into the consumer was softer in the first quarter because of lower spending.

Johnson: Absolutely. … The original read on it was something like 3.4% growth, which seemed really pretty stunning, and now they've reduced it into the high 2% range. So, that's clearly a lower number than we had all thought before, and they brought down some of the other categories as well.

Stipp: The other big part of GDP, obviously not as big as consumer, but business investment spending was worse than they originally thought it was.

Johnson: Yes. They thought that might be down 2%-3%; now it is something much closer to 8% down. So, clearly, the businesses were reacting to the slower consumer and, how are they going to react to the payroll tax situation and the sequester, and [businesses] weren't going out on a long limb, and we suspected this would be a weak category.

Stipp: So business, obviously, has been reluctant to go all-in, while there is still a little bit of uncertainty about softness in the economy.

Let's talk about the consumer a little bit, though, looking forward. You say there are some yellow lights for the consumer in some areas, but also some green lights for the consumer in some areas. Can you explain that?

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