People may have been disappointed with the initial Q2 GDP estimate of 1.3% from the Commerce Department announced last month, but that turned out to be the high point for American economic measures this year.  Commerce revised the estimate sharply downward today to 1.0%, as numbers from the quarter begin to firm up:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.0 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the “second” estimate released by the Bureau of Economic Analysis.  In the first quarter, real GDP increased 0.4 percent.

The GDP estimates released today are based on more complete source data than were available for the “advance” estimate issued last month.  In the advance estimate, the increase in real GDP was 1.3 percent (see “Revisions” on page 3).

The increase in real GDP in the second quarter primarily reflected positive contributions from nonresidential fixed investment, exports, personal consumption expenditures (PCE), and federal government spending that were partly offset by negative contributions from state and local government spending and private inventory investment.  Imports, which are a subtraction in the calculation of GDP, increased.

According to Reuters, economists expected a revision down to 1.1%, and says the US is now on “recession watch”:

Economists had expected output growth to be revised down to 1.1 percent. In the first quarter, the economy advanced just 0.4 percent. The government’s second GDP estimate for the quarter confirmed growth almost stalled in the first six months of this year.

The United States is on a recession watch after a massive sell-off in the stock market knocked down consumer and business sentiment. The plunge in share prices followed Standard & Poor’s decision to strip the nation of its top notch AAA credit rating and a spreading sovereign debt crisis in Europe.

While sentiment has deteriorated, data such as industrial production, retail sales and employment suggest the economy could avoid an outright contraction.

The change mainly came from inventories, which the previous estimate overshot.  Real final sales of domestic goods — GDP less inventory adjustments — remained at 1.2%, making it a rare quarter in the last two years where this measure outstripped the topline GDP growth rate.  Most of the GDP reports have been amped up by inventory expansions.  Another bright spot is a revision in consumer spending, which increased 0.4% rather than the initial 0.1% estimate.  However, exports got downgraded to a 3.1% increase from an initial estimate of 6.0%.

There was one warning note: the core personal consumption expenditure index rose at 2.2%, faster than anything since 2009Q4, according to Reuters.  That may be enough to keep the Fed on the sidelines, which we will know later today when Ben Bernanke gives a speech today on the economy and the Fed’s direction.  If they see a risk of inflation arising, the Fed will not likely engage in another round of quantitative easing.

Politically, of course, this is a rolling disaster for the Obama administration.  The downward revision comes while Obama is on Martha’s Vineyard, enjoying a high-profile “vacation” and promising to get around to a jobs plan … soon.  Commerce will give one more revision to Q2’s estimate in late September, which will put the poor economic performance under his stewardship on display yet again — and then Obama will have to deal with a Q3 result that so far doesn’t look any better than Q2.  If Hurricane Irene doesn’t bring the vacation to an early end, this number really should have the White House political team calling to have Air Force One warming up the engines.