Wall Street Greek: Second Quarter GDP Revision Illusory

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Economic Report

This morning's market should get an initial lift from a better than expected revision to second quarter GDP. The sustainability of any early stock market boost is in question though, as Q3 comes to an end, and market gurus look toward a dull recovery. Also, the day offers an otherwise busy schedule, with the first of the monthly employment reports on tap as well as important manufacturing data from the Institute for Supply Management (ISM).

Second Quarter GDP Revision

The Commerce Department revised second quarter GDP today to -0.7%, from -1.0% when initially reported (and after the first revision offered no change). The improved result also matched importantly well against economists consensus view for a -1.2% contraction in the economy. This final revision comes on the last day of the third fiscal quarter though, and so market expert commentary should focus on Q3 forecasts. Since the contraction, however better it may be, is not much different than that initially reported, its market moving impact will likely not hold.

The Commerce Department reports that the main contributors to economic contraction included lower inventory investment, residential and nonresidential fixed investment, personal consumption expenditures (PCE), and exports. On the positive side of the drivers, federal government spending helped to support growth.

Making the difference in the improvement from first reporting to the final revision of second quarter GDP, real estate!. Nonresidential fixed investment and residential fixed investment both offered smaller decreases upon revision, coinciding with other data. Still, the drivers of economic improvement, or rather less bad contraction, should worry you, so take note here.

Why You Should Worry

Federal government spending programs are being slowly eased out. These sometimes questionable actions may have staved off economic depression, and certainly helped to ease the pain of the Great Recession, but the weening off of programs seems near certain to play a role in a prolonged recovery. The government has been careful in reassuring that it would not take away stimulus unless economic and market conditions warranted it. Stock market investors, however, have been betting on the Feds' help, and as the programs come to conclusion, some confidence is backing away from investment securities. This was clearly seen in State Street's (NYSE: STT) Investor Confidence Index dip in September, to 118.1, from 122.9 in August. We will have another indicator of the importance of government help when September's Motor Vehicle Sales are reported later this week. Moreover, when Ford (NYSE: F), General Motors (NYSE: GM), Honda (NYSE: HMC) and Toyota (NYSE: TM) report results later next month, corporate executives should provide an important view ahead.

Another troubling issue is the temporary nature of economic improvement related to inventory building. While inventory provided a negative contribution to Q2 GDP, in Q3 it is expected to help. This regular "inventory building" occurs after recessions as businesses prepare for economic recovery and growth. What's also standard to economic cycles is a following quarter softening of inventory build and economic activity, and so economists are already talking about a Q4 or Q1 dip back into economic contraction, especially since unemployment at current harrowing heights burdens recovery.

Finally, while the real estate market has stabilized, recent data has shown that the slope of forward home sales might not be beautifully illustrated in a mountainous like ascension. Rather, a series of plateaus and valleys seem certain to ensue. We are taking your two cents on this subject in our latest "Topic of Debate" entitled "Real Estate Recovery Debate," found at the blog.

In conclusion, while today's reported second quarter GDP economic contraction offers surface level good news, economists and market gurus (of any worth) should take away your treat soon enough in the days to come. Therefore, be careful where you place your bets and for how long.