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We knew the U.S. economy had slowed down in Q1 2012. But apparently, it was worse than we initially thought.

It’s hard to say if we were being overly optimistic or not pessimistic enough with our initial estimates that pegged output growth at 2.2% in Q1 2012 following Q4 2011’s 3.0% surge.

After taking a look at more economic data, the U.S. Department of Commerce was forced to revise its Q1 2012 growth estimate down to just 1.9%.

Keep in mind that many were already upset with Q1 2012’s performance even BEFORE the downward revision. Imagine their disappointment when it was confirmed that the economy grew even less than initially reported!

Downward revisions across the board

As you can see in the chart below, all components of GDP (with the exception of fixed investment) took a hit in the Department of Commerce’s first revision.

Advance Estimate vs. 1st Revision

But although we saw a lot of reductions in these components’ contributions to GDP, not all of them are necessarily negative.

There are a number of analysts out there that believe that weaker inventory growth may actually benefit the economy in Q2 2012.

It’s quite simple, really – a smaller stockpile of inventory could force companies to increase production as they strive to meet demands.

Stronger case for QE3?

Overall, what we can take away from this is that there’s a very real possibility that conditions in the U.S. may be much worse and that the need for QE3 is direr than we think.

The surge in consumer spending that we saw in the past few quarters is quickly losing steam, and this presents a major threat to growth. As I mentioned in my guide to trading the April 2012 U.S. retail sales report, over the past year, consumer spending has grown to become the biggest contributor to GDP.

But if it continues to weaken, which component will step up to shoulder the heavy load? Aye, there’s the rub!

In any case, it will be interesting to see if the Department of Commerce will make further revisions in the final version of its GDP report.

And if so, will it weaken the dollar, which has recently been rallying on risk aversion? I guess we’ll all just have to tune in on June 28 to find out!