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By Dirk van Dijk, CFA

In the first quarter, GDP grew at 3.0% (instead of the initially reported 3.2%). This, while slower than the 5.6% growth in the fourth quarter, is actually stronger once you look at the composition of the growth. However the composition of the growth in the second look is not as good as it was in the first look.

For instance, personal consumption expenditures (PCE) added 2.42 points to growth, which while revised down from 2.55 originally, is still a substantial increase over the 1.16 point contribution in the fourth quarter and the 1.95 point addition in the third quarter.

That said, I found the overall revision to be disappointing. In looking at the revisions to the February and March data in various reports as the April data was released, it appeared that the number would be revised upwards, not downwards.

For a more comprehensive take on the initial results of first quarter GDP numbers, we suggest you check out this link from April 30th: GDP Stronger Than It First Looks

Consumption (or Consumer) of Goods Stronger, Services Weaker

Overall Goods added 1.47 points to growth -- revised up from 1.40% -- up from a 0.66 point contribution in the 4Q but down from the 1.59 points in the third quarter. Durable goods were responsible for 0.85 (originally 0.79) points up from just 0.03 in the 4Q but down from 1.36 points in the 3Q.

Consumption of non-durable goods added 0.62 (originally 0.61) points to growth in the 1Q after a 0.63% contribution in the 4Q and a 0.23 point contribution in the 3Q. Services, which in the 1Q were 67.2% of overall PCE and 47.7% of GDP added 0.96 points to growth (a notable decrease from the original 1.15 figure) on top of contributions of 0.49 and 0.37 points in the 4Q and 3Q, respectively.

Fixed Investment: Structures a Drag, Equipment a Lift

Gross Private Domestic Investment added 1.66 (down a tick from 1.67) points to growth, which was a huge slowdown from the 4.39 contribution in the 4Q, but well above the 0.54 contribution in the 3Q. Fixed investment is the higher quality part of investment. It added just 0.01 (originally 0.10) points to growth in the 1Q, down from a 0.61 contribution in the 4Q but above the 0.15 subtraction from growth it provided in the third quarter.

Residential Investment has been the major thorn in the side of this economy for a long time. This quarter it again became a net subtraction of 0.28 (revised slightly from 0.29) points from overall GDP growth. Non residential fixed investment added a total of 0.29 (down from the originally reported 0.38) points to growth in the 1Q, down from 0.51 points in the 4Q but up sharply from the 0.59 point subtraction in the 3Q.

Given the large upward revision to the March (and to a lesser extent February) numbers that was released yesterday, it is surprising that there was no significant improvement in this category from the original read. The tax credit is about to expire again, and this time there are not a lot of noises being made about extending it (it was effective, but extremely expensive and generally a very bad way to stimulate the economy).

As predicted, we saw another spike in new home sales in April (see: New Home Sales - WOW!) followed by a hangover in May and June, so it is an open question as to if Residential Investment will return to being a positive contributor to growth in the 2Q or will once again be a drag on the economy.

Investment in non residential structures (like offices and stores) subtracted 0.49 (originally 0.44) points from growth in the fourth quarter, which is at least better than the 0.62 point subtraction in the 4Q and the 0.68 point drag in the 3Q. The drag from lower business investment in buildings was offset by business buying of equipment and software, which added 0.78 (down from 0.83) points in the 1Q on top of additions of 1.13 points in the 4Q and just a 0.10 point addition in the 3Q.

Inventories: More Than First Report, Less Than 4th Quarter

The really big swing factor though lately in economic growth is the non-fixed part of investment, otherwise known as the change in inventories. In the first quarter, we actually saw inventories increase, rather than just shrink at a slower pace. This resulted in inventory investment adding 1.65 (revised up from 1.57) points to growth or 55% of the total growth. We will probably see at least one more quarter where inventory growth is a net addition to growth, but it will probably be a smaller contribution than in the 1Q.

Government: State & Local Drag Bigger Than Federal Lift

For those of you who fear that the economic growth we are seeing is all a mirage due to higher government spending, your fears are not particularly justified by this report. Overall government spending was actually a net drag of 0.40 (up slightly from 0.37) points to growth coming on top of a net drag of 0.26 points in the 4Q. In the 3Q, government spending added 0.55 points to growth, and it was just about the only thing keeping the economy afloat during the 2Q, adding 1.33 points that helped offset contractions elsewhere that led to a 0.7% decline in overall GDP in the 2Q.

Federal government spending grew by 1.2% (down a tad from 1.4%) and as a result added 0.10 (originally 0.11) points to the overall growth rate of GDP. Of that, 0.06 (revised from 0.07) points of growth came from Defense spending and 0.04 (unchanged) came from non-defense spending.

In the first quarter, falling state and local government spending was a 0.49 (up a tick from 0.48) point drag on overall economic growth, up from being a 0.27 point drag in the 4Q and just a 0.80 point drag in the 3Q. In the 2Q, S&L spending actually contributed to growth by 0.48 points. Look for the drag from S&L spending to not only continue but probably accelerate in the next few quarters.

International Trade: A Large & Growing Drag to the Economy

Increased exports added 0.82 (up notably from 0.66) points to growth, but that was down from a 2.36 contribution in the 4Q and a 1.78 point addition in the 3Q. However, those gains were more than offset by increased imports that slashed 1.48 (more than the originally cited 1.28) points from growth in the 4Q.

Net exports were a 0.66 (revised from 0.61) point drag on GDP in the 1Q rather than the 0.27 contribution in the 4Q, but better than the 0.81 point drag in the 2Q. The price of oil is really a key variable in the net export situation as petroleum makes up about half of our trade deficit. Increasing domestic production of oil might help, but that is not going to be easy to do since we have already depleted most of our on shore reserves, and the Deepwater Horizon disaster reminds us that it is not all that easy to increase our production offshore.

A major part of the solution would be use more natural gas which is very abundant on shore as well as offshore -- and if BP and Transocean (NYSE:RIG) had been drilling for gas instead of oil when the disaster occurred, there would be no oil slick, just a lot of bubbles rising to the surface.

In Summation

All things considered, this was still a solid but not spectacular GDP report. In the short term, it is good to see more of the growth coming from PCE, particularly from durable goods, and less from inventory investment. While we probably have a little more support from inventory investment left in the second quarter, it is likely to make a smaller contribution than it did in the first quarter, and will most likely be negligible by the third quarter.

If growth is all due to inventory growth, the economy becomes extremely vulnerable to a double-dip recession. The construction side of the economy is still a major drag on overall growth, both residential and non-residential. We will probably start to see the residential side be a small but growing contributor to growth in the quarters ahead, while the non-residential side will continue to be a drag.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

Source: Updated Q1 GDP Numbers: Solid, Not Spectacular