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Atlanta Fed GDPNow gauge takes a tumble to 0.7%

Manufacturing down for the Empire State
Manufacturing down for the Empire State

The drumbeat of disappointment is continuing for the U.S. economy, with the latest numbers showing the third quarter looking a lot like the first quarter.

While economists continue to search for signs that domestic growth is finally loosening the shackles of the financial crisis, the data suggest otherwise. An initial reading Monday for the third-quarter manufacturing outlook was bleak, and the spending outlook both for consumers and businesses does not suggest rapid improvement anytime soon.

Hence, the result: The Atlanta Federal Reserve's GDPNow tracking tool, which has been a pretty reliable rule of thumb lately, indicates third-quarter advancement of just 0.7 percent, with the momentum to the downside. The indicator has dropped 0.3 percentage point just in the past week as the model adjusts for a likely decline in inventory build for the three-month period. (The CNBC/Moody's Analytics Survey has GDP growth at a comparatively lofty 2.6 percent.)

That lower reading also reflects conditions before the plunge in the Empire State manufacturing index released Monday morning, which showed that activity in the New York region contracted considerably. Gross domestic product increased 2.3 percent in the second quarter—a number economists are revising up due to a sharp but likely unsustainable inventory build—after rising just 0.6 percent in the first quarter.

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Peter Boockvar, chief market analyst at The Lindsey Group., called the Empire reading "awful" and said it was the worst for the data point since April 2009.

Workers box jars of pasta sauce at a plant run by Chelten House Products in Bridgeport, N.J.
Jonathan Spicer | Reuters

"It was not a good start to the August data, and a stronger dollar, weak growth overseas and a still 2 percent U.S. economy doesn't lend itself to a robust manufacturing outlook," Boockvar said in a note.

A principal problem is that some of the key ingredients seen as leading drivers behind growth fail to sustain momentum. Spending is one such point.

Consumers seem to be making at least a gradual comeback, with retail spending numbers last week modestly better than expectations. The GDPNow tracker actually indicates a stronger growth rate for the metric, rising from an originally projected 2.9 percent in the third quarter to 3.1 percent.

Business spending, however, is not providing follow-through.

Nonresidential business fixed investment fell 0.6 percent to $2.27 trillion after increasing a modest 1.6 percent in the first quarter, according to the Bureau of Economic Analysis. Durable goods orders declined 6.6 percent annualized and wages are growing at just a 2 percent pace, also reflecting a general tendency of U.S. business to focus more on boosting share prices than investing in the future.

"Businesses ... continue to cut investment at a time when near-zero interest rates would typically argue for corporate expansion," Lindsey Piegza, chief economist at Stifel Fixed Income, said in a note. "While unclear whether or not fiscal uncertainty surrounding both taxes and regulation offsets the benefits from easy money policy, it is crystal clear that businesses remain sidelined."

While consumer expenditures account for about 68 percent of the $17.8 trillion U.S. economy, Piegza said much of that is driven by business spending.

"Six years into the recovery, companies are still unwilling to invest in equipment, software or full-time, high-wage employees," she added. "Without business development to support consumer spending, there is very little hope for additional momentum in consumption or overall activity, let alone 'more of the same,' as we look further out into the second half of the year."

Of course, all economic prognostication roads run straight to the Fed.

Read MoreMarket changes mind, again, about Fed

Boockvar believes the central bank is going to hike interest rates in September, as do most other Wall Street forecasters. JPMorgan cut its Q3 growth projection from 2.5 percent to 2.0 percent but said it was sticking with a September cut forecast, though acknowledging it is a "very close call." Goldman Sachs economist Zach Pandl advised waiting until other Fed manufacturing surveys come out before judging whether the New York number reflects broader weakness.

Among traders, though, the story is different: The CME Group's FedWatch forecast assigns just a 41 percent chance for a liftoff next month, with a 68 percent probability for December.