In a previous post I discussed the increased probability of Q2 GDP contracting (found here) with inventory, government and or trade the most likely sources.

The assumption with that forecast was that the consumer component of GDP would continue to contribute to growth, yet this revision shows the complete opposite occurring making the probability of contraction that much higher.

The consumer contribution to GDP fell from 1.92% to 1.52% down from 2.80% in Q4.

Final sales (a measure of GDP minus inventory changes) was revised lower from .84% to .65% reflecting the weakness in the consumer.

Inventory was in fact revised higher from .93% to 1.19% thus offsetting the drag from the consumer. This raises a big flag though because if consumer demand is falling there is no incentive for manufacturers and retailers to grow inventory.

Increased inventory levels contributed strongly to recent economic growth but should retailers view these levels as adequate or excessive they will in fact begin contracting until consumer

By Tony Pallotta

http://macrostory.com/

Bio: A Boston native, I now live in Denver, Colorado with my wife and two little girls. I trade for a living and primarily focus on options. I love selling theta and vega and taking the other side of a trade. I have a solid technical analysis background but much prefer the macro trade. Being able to combine both skills and an understanding of my "emotional capital" has helped me in my career.

© 2011 Copyright Tony Pallotta - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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