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Kimberly Amadeo

Wall Street Overreacts to Q2 Slow GDP News

By August 26, 2011

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The BEA revised its estimate down for the second quarter (April-June) 2011 GDP. Instead of growing 1.3%,  it turns out the economy only grew 1%.  (Still, it's better than first quarter's measly .4% growth.) This was not good news for Wall Street, which is worried about the potential for a double-dip recession.  The Dow initially dropped on the news, before recovering  by the end of the day on Fed Chair Bernanke's statement that the economy doesn't need more stimulus.

Whether it's 1% or 1.3%, Wall Street would like to see the economy grow a robust  3% or so. That's what's needed to create new jobs.  It's not even enough growth (2%) needed to maintain the status quo.

However, Wall Street is panicking too soon. The sluggishness in the second quarter was probably only temporary, a result of the Japanese disaster that's slowed auto parts orders. In fact, durable goods orders picked up 4% in July.

Exports were up 3%, while imports were only up 1.9%. That helped growth, since imports lessen GDP.

Government spending was only up 2%, driven mostly by a 7.1% increase in defense spending. Expect GDP to suffer whenever budget cuts are implemented.

For a history of all GDP reports since 2007, see GDP Current Statistics.

What It Means to You

The U.S. and EU economies are sluggish, but the BRIC countries -- Brazil, Russia, India and China -- are still holding their own. If you are an investor, make sure your portfolio has plenty of foreign-based mutual funds. If you are a small business owner, look into exporting assistance from the Small Business Development Center near you.

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