US GDP Improves To -1% Drop

The pace of economic contraction slowed to a 1.0% pace in the second-quarter, far better than economists had expected. (The consensus forecast called for a 1.5% drop.)

More importantly, the Q2 number cements the observation many of us have been drawing — the economy is starting to hit bottom. Several economic reports have shown signs of a slowing pace of deterioration over the past few months. And, in the most recent Beige Book, the Fed discussed “stabilization” 5 times.

Though the number will be we cheered by the bulls, it is critical to understand that bottoming and growth are 2 very different things. More importantly, the recovery will not feel like a recovery to many Americans. Jobs will continue to be cut and the “pent-up demand” will not change into a dramatic increase in spending anytime soon.

Furthermore, the economy still has a long way to go just to get back to breakeven. GDP fell at a 6.4% pace in the first quarter and a 5.4% pace in the fourth quarter. Even if the more optimistic forecasts prove to be correct, the economy will end 2010 with pretty much not showing any growth during the first 2 years of the Obama presidency.

For stocks, this means a prolonged trading range will likely form. That is not a bad thing, but it’s not a bull market rally either. Investors, therefore, need to use a combination of both less-economically sensitive stocks and those that could benefit from an improving economy. For example, in Zacks ETF Trader, I’m using a mix of consumer staples, health care and technology funds.

Stock investors could follow a similar strategy by looking at companies such as Texas Instruments (TXN), IBM (IBM), Amgen (AMGN) and Pepsi Bottling Group (PBG).

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