Adolfo Laurenti, Deputy Chief Economist
August 27, 2010 – 8:00 a.m. CT
GDP Revised Down Less Than Expected, but Still Provides Disappointing Picture of a Weakening Economy
Economic growth in the second quarter was revised down from an already moderate level of 2.4 percent to a modest 1.6 percent. The negative revision to GDP was in the cards, following weaker-than-expected data released in recent weeks; if anything, the actual numbers beat the expectation of an even more negative reading. Make no mistake though, this is still a pretty disappointing reading.
The two factors driving the revision down were a slower accumulation of inventories and an acceleration of imports, which trimmed about half of a percent point each from the growth rate for the quarter. Consumption and business spending showed small improvement over the first quarter, and helped to contain the damage.
The softening in economic conditions might result in a new hit on consumer and investor confidence. While we do not anticipate a double dip recession for the second half of 2010, the probability of such an adverse outcome has risen. To a large extent, the debate is about semantics: growth is expected to hover around 1.5 percent and 2 percent in the current quarter, and the economy faces a real risk of two consecutive quarters of stagnation, thus dampening hopes for a more robust turnaround in employment. Job creation remains the key challenge, and unfortunately we do not anticipate any improvement soon.
Now the attention switches to the actions that policymakers may take to respond to the current slowdown. Later today we will hear from Fed Chairman Ben Bernanke, addressing an audience of policymakers and top economists at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming. The Chairman is expected to map a re-entry strategy for the Federal Reserve: a message that will become even more critical after the bad news of the morning.
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