INSTANT VIEW: U.S. GDP shrinks at slower-than-expected pace

NEW YORK (Reuters) - The U.S. economy contracted at a slower-than-expected pace in the second quarter as the slump in business and residential investment moderated sharply, according to government data on Friday that backed views the recession was winding down.

KEY POINTS: * Gross domestic product, which measures total goods and services output within U.S. borders, fell at a 1.0 percent annual rate, the Commerce Department said, after tumbling 6.4 percent in the January-March quarter, the biggest decline since a matching fall in the first quarter of 1982. It was previously reported as a 5.5 percent drop. * With the contraction in the second quarter, U.S. GDP has fallen for four straight quarters for the first time since government records started in 1947.

COMMENTS:

SUBODH KUMAR, CHIEF INVESTMENT STRATEGIST, SUBODH KUMAR & ASSOCIATES, TORONTO:

"Things are not getting worse but I don't think that's enough to drive the stock market higher. It is not enough to see things are not as bad as people had thought.

"When you have the S&P at 1,000 it has already incorporated all of 2009 earnings including recovery and is more sensitive to the spot numbers."

BURT WHITE, CHIEF INVESTMENT OFFICER, LPL FINANCIAL, BOSTON:

"Production fell less than expected but consumer consumption fell more than expected. So this was basically a report that showed businesses were doing a little better than we thought and consumers were doing a little worse than we thought.

"I think the market's selling off because of the consumer element. That's 70 percent of GDP and that was a little softer than we thought.

"The silver lining is we're continuing to see inventories get drawn down. You can only do that for so long because that just means that companies are finding their shelves are more and more bare and I think that bodes well for the second half."

NIGEL GAULT, CHIEF U.S. ECONOMIST, IHS GLOBAL INSIGHT, LEXINGTON, MASSACHUSETTS:

"The revisions are showing that the recession was deeper than originally announced in the GDP accounts. I don't think that's a big shock. We knew that various income measures were showing a more gloomy picture than the GDP numbers were painting.

"The whole picture is just of a deeper recession, although we still have the picture that everybody was looking for between the first quarter and the second quarter, which is that the rate of decline became substantially less.

"I think we and everybody expect the inventory cycle to start to turn from the third quarter, so from here on, inventories will be making a positive contribution to growth.

"If from now on, even if growth may not be that spectacular, we are going to be returning to growth in terms of GDP. The gloomiest bit was probably on the consumer spending side, that was worse than people were looking for, and the first quarter increase is even more anemic than first announced and that remains the missing link in terms of anybody hoping for a strong recovery.

"My immediate reaction is that it still leaves us expecting modest but positive growth in the second half of the year and a rather gradual recovery."

JOHN RYDING, CHIEF ECONOMIST, RDQ ECONOMICS, NEW YORK:

"I think it's much better than expected because inventories subtracted from growth. If you exclude inventories GDP was down only two tenths of a percent."

"You have a much bigger inventory drop than anybody anticipated and it really sets the stage for a positive third-quarter growth number and maybe now a pretty decent pop to the third quarter given the size of the inventory draw down."

"It bodes very well for the third quarter."

WILLIAM LARKIN, FIXED INCOME PORTFOLIO MANAGER, CABOT MONEY MANAGEMENT, SALEM, MASSACHUSETTS:

"It wasn't a negative surprise! That's what the market was really alarmed about, that we could get something much more

negative than the survey. It's a summer Friday, things are going to go on as normal. But I looked at the quarterly annualized number, which was revised to -6.4 percent, and that's a large negative. Overall it was fairly positive, and it's definitely a sign that the recession is easing, and that we're getting on the other side of this cycle. We're getting small incremental improvements. It's slow, it's like watching paint dry, but we're definitely getting signs that things are getting better. We'll probably start to see the shovel-ready municipal projects and get results from them, so we have that in the pipeline.

"I assume the drop in inventories is good news. Sometimes the drop in inventories, you know the purchasing didn't' take place. So either the purchasing didn't take place or the consumer's turning. But we'll see that on the retail side."

PIERRE ELLIS, SENIOR ECONOMIST, DECISION ECONOMICS, NEW YORK:

"The second quarter breakdown is more or less in line with expectations. Consumer spending was a little soft. The economy got a big boost from government spending.

"The relatively good news is that the inventory sell-off was much more dramatic than was generally expected and that probably sets us up probably for a boost in the third quarter. But that could be a 'sugar high' rather than a change in the fundamental direction of the economy, because a lot of manufacturing is down abroad. So the halt in inventory liquidation might lead to a boost in imports, rather than fully benefit domestic manufacturers.

"It's still a shaky outlook for the economy, but no shakier than before. No one's world view will shift. Consumer spending is very shaky now. That's the major risk in the economy."

PETER CARDILLO, CHIEF MARKET ECONOMIST, AVALON PARTNERS, NEW YORK:

"The numbers came in a bit better than expected, a little bit of a revision from last month... The stock market is lower here but it's just a pure case of selling on the news. The reports indicate that consumer spending is pretty much still under pressure, but that points to a recovery in the third quarter."

CARL LANTZ, INTEREST RATE STRATEGIST, CREDIT SUISSE, NEW YORK:

"The whisper number was for something stronger than we got, and the details don't necessarily look great. The consumption number especially was weaker than people were looking for -- this was a very consumer-led downturn. The inflation data was very benign, and the top-line number was boosted by government spending. So the details are not as robust as was hoped."

ASHRAF LAIDI, CHIEF MARKET STRATEGIST, CMC MARKETS, LONDON:

"It's better-than-expected but the FX market is quite flat and stock market futures are not impressed. We're seeing a renewed decline in the consumer spending index, which was -1.2 percent in Q2 after an increase of 0.6 percent. So the better-than-expected number seems to be offset by a renewed decline in consumer spending. This report has written all over it the continued divergence between consumers and businesses. Consumers are still struggling. I don't expect this to be a big boost for risk appetite."

MARKET REACTION: STOCKS: U.S. stock index futures turn negative BONDS: U.S. Treasury debt prices turn positive DOLLAR: U.S. dollar pares gains versus yen; euro falls versus the dollar