U.S. economic growth slowed more sharply than initially thought in the second quarter, held back by the largest increase in imports in 26 years.

KEY POINTS: * Gross domestic product expanded at a 1.6 percent annual rate, the Commerce Department said, instead of the 2.4 percent pace it had estimated last month. * The reading was a touch better than market expectations. Analysts polled by Reuters had forecast GDP, which measures total goods and services output within U.S. borders, revised down to a 1.4 percent growth rate. The economy grew at a 3.7 percent pace in the first three months of the year. * The revised GDP data will likely fuel analysts' concern that the economy is at growing risk of slipping back into recession. Federal Reserve policymakers were meeting on Friday at their annual retreat in Wyoming to ponder the economy's direction and hear from Fed Chairman Ben Bernanke.

COMMENTS:

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

The numbers are showing there is recovery, but earlier this year the (stock) market was too enthusiastic about a seamless recovery back to the good times. In the last few weeks it's been too concerned about going to a double dip, so the bounce we're seeing today is day-to-day volatility on the recovery scenario.

DAVID ADER, HEAD OF GOVERNMENT BOND STRATEGY, CRT CAPITAL GROUP, STAMFORD, CONNECTICUT:

The market is off rather harder than we would have thought on this, and surely we can't see anything in this report to justify much of a response. Fives and tens are leading the weakness -- watch tens versus 2.55-plus percent. We are impressed with the tens/thirties flattening and note the 101 basis point level was the breakout from July and so an important support. Below this we have a 93-95 basis point target.

RYAN DETRICK, SENIOR TECHNICAL STRATEGIST, SCHAEFFER'S INVESTMENT RESEARCH, CINCINNATI, OHIO:

Recent economic data has been so very weak, but the GDP numbers today show that this may not be the end of the world. We are seeing a relief rally because we saw a lot of selling coming into it but I see this more as a short term bounce. We came very close to closing at 1,040 (on the S&P 500) yesterday which is a logical place for buyers to come into the market in a technical point of view. Now, we have bit of a fundamental driver as well for investors to buy stocks.

CARY LEAHEY, ECONOMIST, DECISION ECONOMICS, NEW YORK:

The substantial downward revision in Q2 GDP from the 2.4 percent first reported to 1.6 percent was expected and was all due to foreign trade: lower exports and higher imports. Up until this year U.S. GDP was getting a boost from its foreign trade position, but that has all evaporated. Europe is barely growing outside of Germany and where there's growth it's coming from foreign trade. A widening trade gap holds down U.S. growth and makes the global recovery less secure.

U.S. bonds are down on the rumor trade before Bernanke. The market is setting itself up for a potential bloodbath today because it's not clear that Bernanke can stick his neck out and talk about a major change in quantitative easing with a substantial minority of his Federal Open Market Committee members expressing reservations.

There is a touching faith that Bernanke sets the economic agenda for Congress, the Administration and the Federal Reserve and the markets seem to think Bernanke can initiate wide-ranging efforts.

Bernanke can't announce a Marshall Plan to deal with mortgage foreclosures or small business lending, but the markets are acting as if they think he can.

Bernanke could say the President has asked him to help out with a Marshall Plan for the mortgage situation, but he can't take the first step, at least in public.

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

The instant reaction is that it isn't good but we thought it might be worse, so there might be a bit of relief.

But on reflection I think people will decide these numbers will confirm the economy is slowing sharply. You combine these with any other numbers we've gotten from the third quarter and there's little reason to think the (next) quarter is going to be better.

RYAN WANG, U.S. ECONOMIST, HSBC SECURITIES, NEW YORK:

On marginal side, it's good news. I don't know if this tells us very much about a double-dip (recession). We have already seen soft data over the last two months.

Bernanke has to acknowledge the soft data over the last two months and give his outlook on how the economy is evolving. He has to explain the thinking behind the Fed's August action to hold the Fed's balance sheet steady and any possible policy action going forward.

ZACH PANDL, U.S. ECONOMIST, NOMURA SECURITIES INTERNATIONAL, NEW YORK:

Overall it is a little bit better than some of the fears out there. The composition of growth is a little bit more favorable than we were looking for, most importantly services consumption, which has been an area of the economy showing puzzling weakness. (This) has started to pick up a little bit in the second quarter. So consumer outlays are on an improving path. That is a positive sign for the outlook and the data is a little more favorable than some people had feared.

This offsets (recent weak data) only a little bit. The problem with the outlook is that indicators that have historically been reliable leading indicators have begun to deteriorate. Manufacturing orders, claims for unemployment benefits, survey-based data, a whole host of indicators that typically lead real measures of activity like GDP, employment, production, et cetera are turning worse. It seems only a matter of time before GDP slows a bit further.

That being said, I think it is important to keep in mind that this GDP report emphasizes that the recovery is a year mature and that we are on a growth path. There is a bit of momentum in the economy now and it will take a pretty big shock to dislodge it off of that course.

MARKET REACTION: STOCKS: U.S. stock index futures added to gains BONDS: U.S. Treasury debt prices extended losses DOLLAR: U.S. dollar added to gains against the yen

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