Economists' GDP estimate was revised down dramatically to 0.4% from 1.9% due to two main factors
Although the big news today was supposed to be the second quarter's growth rate, it was overshadowed by the giant revision to first quarter GDP. The second quarter's growth was pretty weak at 1.3%, but the first quarter's growth was revised down from 1.9% to a measly 0.4%. This is a pretty drastic change, particularly during a quarter when the economy appeared to be gaining some steam. What happened?
If you dig into the numbers you find two main culprits responsible for the revision: business investment and net exports. Let's see what happened here.
In June, the first quarter's growth in business investment was estimated to be $52.4 billion, annualized. Instead, economists now say it was just $16.4 billion. Investment in equipment and software was little changed, however. Home sales were also estimated pretty accurately.
The main reason why business investment was worse than we thought was due to inventories. Instead of growing at the annualized rate of $39.5 billion, they grew at the rate of just $10.8 billion. This indicates that firms weren't ramping up their inventories as rapidly as thought.