After sliding from a stall speed-esque 2% in Q1 to sub stall speed 1.5% in the Q1 preliminary print, today's first revision was expected to be a solid bounce to the horrible preliminary economic data, with whisper numbers heard as high as 2.0% on the back of the recent plunge in the deficit (driven purely by a collapse in Chinese exports and a brief drop in crude prices in June, long since retraced). Instead the number came precisely in line with the consensus estimate of a 1.7% annualized growth, with the all important Personal Consumption Expenditures adding a modestly higher 1.20% (was 1.05% last). As expected, net exports shifted from a decline of -0.3% to an increase of 0.3%, which meant that the fudge factor was inventories, which also flip flopped, declining from the previously positive 0.32% to a negative -0.23%.
[5]
In summary, the GDP number was the worst possible for a market in which good news, relative to an expectations benchmark, is good news, and bad news is great news. The only thing the algos don't know what to do is when numbers come "just right" - which is what just happened. And now- back to Congress doing nothing to resolve the Fiscal Cliff which would detract up to 4% from GDP in 2013 if nothing is done, which is assured as long as the S&P continues trading near 2012 highs.
Source: BEA [6]