GDP Revised Downward — Bad Or Good News?

First the bad news:  Gross Domestic Product increased at an annual rate of 1.6 percent in the second quarter of 2010 from the first quarter. The good news is that this revision from the earlier estimate of 2.4 percent was better than the 1.4 percent gain expected by analysts polled by Bloomberg News.

Though that’s hardly great news, it underscores the argument that the economy is headed for a slowdown though not a double-dip recession.
The increase in second quarter real GDP reflected positive contributions from nonresidential fixed investment, personal consumption expenditures, exports, federal government spending, private inventory investment, and residential fixed investment. Imports, which are deducted from the GDP calculation, increased.

The stock market took the news badly as investors continue to fret over intractable problems such as unemployment and the housing market.  Data for the second quarter shows that the economy grew at an unadjusted rate of 3.7 percent.  So much for the “Recovery Summer.” The economy is sputtering like a car engine gasping for a last drop of fuel to keep going.

Data in the second quarter shows the economy wheezed in the second quarter as companies invested in big ticket items such as computers and machinery though the continued sluggishness in trade, unemployment and housing all dragged it down. Indeed, the largest surge in 26 years pushed up the trade deficit by 16 percent in June.

Writing in the Washington Post today, Mohamed A. El-Erian, Pimco’s chief executive and co-chief investment officer, sounded a pessimistic tone about the possibility of the word economy getting back on tack anytime soon.

“Unfortunately, the approach in too many industrial countries has been to kick the can down the road, seemingly hoping for a series of immaculate economic recoveries,” El-Erian writes. “Policymakers must break this active inertia by implementing a structural vision to accompany their current cyclical focus.”

Easier said than done.

U.S. policymakers are only looking to the critical midterm elections in November. Issues such as the deficit and government spending continue to be debated and debated with no end in sight. Now, Federal Reserve Chairman Ben Bernancke is due to add his latest analysis of the economy later today.

Investors are eager — as always — to hear what Bernanke has to say. Maybe he has discovered the magic elixir that has eluded everyone else. More likely, though, he probably will have nothing new to say.

–Jonathan Berr