I agree that despite the GDP report’s strong internals, the ‘headline’ miss will likely be the major driver of today’s trading action. The reason for that in my view is that the report is not weak enough to warrant Fed action, but also not strong enough to make investors feel good about the Fed economy. As such, looking at it from the perspective of ‘what Bernanke will do’, this report is not QE-friendly.

Here are the details:

In its first read on the fourth quarter of 2011, the commerce department reported that the U.S. economy expanded at a weaker than expected 2.2% pace in the first quarter of 2012, down from the fourth quarter’s 3% growth rate. The expectation was for the GDP number to be up 2.5%, though many were looking for growth rates above that level.

While ‘headline’ growth rate missed expectations and dropped from the preceding quarter’s level, the composition of growth improved. Weak spending by governments and businesses offset surprise strength on the consumer spending front to give us the negative surprise. Personal consumption expenditures (PCE), or consumer spending, which accounts for close to 70% of the economy, increased by 2.9%, compared to the 2.1% increase in the fourth quarter. Households spent more on non-durables and services compared to the fourth quarter, driving the strong PCE gain. The major negative contributor to growth during the quarter was government spending, which declined 5.6% in the quarter following a 6.9% drop in the fourth quarter. Contribution from state and local governments was also negative.

The weakness in government spending may not be that worrisome or problematic, though it has a bearing on overall growth in the economy. But the deceleration in business spending during the quarter does not look promising. Non-residential fixed investment was down 2.1% in the quarter, compared to the 5.2% increase in the fourth quarter. Corporate spending on software and equipment decelerated materially from the fourth quarter’s 7.5% growth pace to an increase of only 1.7%. Inventories were less of a growth contributor to growth this quarter, adding only 0.59% compared to the 1.8% growth contribution in the fourth quarter.

I don’t like the ‘headline’ miss, but I don’t think it’s overall a disappointing report. Do you?

To read this article on Zacks.com click here.

Zacks Investment Research