To: StormRider who wrote (33670 ) 8/29/2001 11:10:24 AM From: StormRider Respond to Q2 GDP : Ironically, the market, which is a forward-looking entity, is taking comfort from a backward-looking indicator. The indicator Briefing.com is referring to is the revision to the Q2 GDP report. The preliminary read, which was provided on July 27, indicated a scant 0.7% increase, slightly below the consensus estimate at the time of 0.9%. On that day, the equity market greeted the news in guarded fashion, unnerved by the thought that the pace of economic growth was continuing to decelerate from the 1.2% increase registered in Q1. So, how can it be that the market looked relieved this morning to hear that Q2 GDP growth was revised to an even more scantly 0.2%? The answer lies in the fact that the consensus expectation for the revised number was for no growth-- as in 0.0%. As Briefing.com pointed out in a story stock earlier this week previewing the revision, that consensus estimate provided the backward-looking report with some added importance given its proximity to negative territory. From an economic standpoint, a read of -0.1% isn't materially different from 0.0%. The minus sign, though, would indicate negative growth, and undoubtedly, trigger recession fears. In that sense, we argued that a negative number had more relevance for the market from a psychological standpoint than anything else. Thus, when the revision came in better than expected, the market breathed a sigh of relief. A few of the details from the revision provided some added support, too. Specifically, personal spending rose a stronger 2.5% than first reported, the chain weight deflator was revised slightly lower to 2.2%, indicating that inflation is not a concern, and the 2% decline in corporate profits compared favorably to the revised 7.8% drop in Q1, suggesting that the massive cost-cutting is having immediate effects despite the continued weakness in demand. Nevertheless, the positive response to the revised number has been short-lived as there is no getting around the fact that the pace of economic growth is headed in the wrong direction. More importantly, though, there is no getting around the idea that the economy isn't going to bounce back in meaningful fashion anytime soon given the ongoing layoff announcements, the plunge in business investment, further signs of lackluster end demand, and the contagion effect of the U.S. slowdown on economies around the globe.-- Patrick J. O'Hare, Briefing.com
