Q2 GDP Research Notes

by Jim Baird on August 26, 2011

Consumers continue to retrench as the economy muddles along

Last month’s GDP release, which painted a picture of a sharply slowing economy in the first half of 2011, was a surprise and a disappointment.  Today’s revision doesn’t pack the same punch, but it does reinforce that the economy is struggling to move forward.  At an annualized rate of growth of just 1.0% for the quarter, perhaps the only positive news is that the result wasn’t worse.

Stocks have been on a volatile ride since late July as the market deliberates whether or not the long-anticipated second half rebound will develop, whether the economy will slip into recession again soon, or whether it will continue to muddle along.

Given the slowdown of several broad economic indicators in recent weeks and months, economists have been reducing expectations for the second half of the year to just over a 2% annualized rate.

Confidence remains low, and the impact is being seen as consumers continue to retrench.  Real personal consumption expenditures grew at an exceptionally weak 0.4% rate during the quarter, the poorest result since the fourth quarter of 2009.  Moreover, other drivers of the economy aren’t providing much support to overcome weak consumer spending.

Slow growth remains the base scenario for the U.S. economy, but the growing risks of recession cannot be ignored.  All eyes remain on the Fed’s Jackson Hole conference and the markets will be carefully parsing the speech given by Fed Chairman Ben Bernanke.  There are high hopes that the Fed will be the white knight who will ride in to rescue the economy through additional stimulus measures, but there’s a significant risk that the markets will be disappointed.  Whatever the outcome of that speech, market volatility seems likely to persist.

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