2Q GDP growth less than expected

GDP data as well as Personal Consumption and the U. of Michigan Confidence reports. Treasuries prices are higher after it was reported that the economy performed slightly worse than expected in the second quarter of this year. Currently, the 2-year note is trading 1/32 higher yielding 0.19% while the 5-year note has risen 7/32 to yield 0.94%. The benchmark 10-year note is currently up 17/32 to yield 2.17% and the long bond has jumped 1 and 10/32 points to yield 3.53%.

The Commerce Department announced that Gross Domestic Product increased by 1.00% in the second quarter of 2011, versus a previous estimate of 1.10% recorded last month. This worse than expected increase was partially due to exports registering a much lower growth rate in the quarter versus the previous 3.10% and the first release of 6.00%.  Also, a change in inventories affected GDP as they were revised lower from $49.6 billion to $40.6 billion for 2Q. Companies typically adjust inventory levels in preparation for an increase/decrease in consumer demand. Therefore, a decrease in inventories could indicate companies do not expect consumer demand to pick up significantly anytime soon. Partially offsetting the drop in inventories and exports, Personal Consumption, the biggest contributor to GDP, increased by 0.40% for the quarter, analysts had been expecting it to increase 0.20%. This was mainly driven by increases in Nondurable goods (0.40% vs. 0.10%) and Services (1.40% vs. 0.80%).

The University of Michigan Consumer Confidence report will be released at 9:00 am CDT; analysts are expecting consumer sentiment to improve slightly from the previous 54.9 to 55.8.  Although not a “Tier 1” economic indicator, the U. of Michigan confidence report may predict sudden shifts in consumption patterns; a worse than expected reading would attract the attention of investors as it could have a future impact on the consumer component of the Gross Domestic Product which is 71.00% of the U.S. Economy as shown in the chart below.