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Sunday, July 14, 2013

Q2 GDP tracking 1.0%

by Calculated Risk on 7/14/2013 10:02:00 AM

From Merrill Lynch:

Our tracking model now pegs 2Q GDP growth at just 1%, and we only get that high with some fairly generous bounce back assumed for some of the missing data. We don’t see anything fluky about this number: it is the third weak quarter in a row.
From MarketWatch:
Barclays ... cut its second-quarter GDP trading estimate to 1.0% from 1.6% after the trade deficit widened in May. In a note to clients, Barclays blamed the larger-than-expected increase in imports in the month for the downward revision.
J.P.Morgan also cut their Q2 forecast to 1.0% (from 2.0%).

This mid-year slowdown has been expected due to the significant drag from fiscal policy. Here is what I wrote in January: The Future's so Bright ...
The key short term risk is too much additional deficit reduction too quickly. There is a strong argument that the "fiscal agreement" might be a little too much with the current unemployment rate - my initial estimate was that Federal government austerity would subtract about 1.5 percentage points from growth in 2013 (Merrill Lynch estimate up to 2.0 percentage points including an estimate for the coming sequester agreement). This means another year of sluggish growth, even with an improved private sector (retail will be impacted by the payroll tax increase). But ex-austerity, we'd probably be looking at a decent year.
Note: Fiscal policy is even more negative than I thought in January because I assumed some sort of agreement on limiting the sequestration budget cuts.  The good news is the fiscal drag should start to diminish later this year.

FOMC Projection GDP Tracking Click on graph for larger image.

Last month I posted Four Charts to Track Timing for QE3 Tapering . Here is an update to the GDP chart.

The June FOMC forecast was for GDP to increase between 2.3% and 2.6% from Q4 2012 to Q4 2013.

The first quarter was below the FOMC projections (red), and it appears the second quarter will also be below the FOMC forecast..  Of course the Fed appears to be focusing mostly on employment to start tapering QE3 purchases, but they can't ignore other data (the advance estimate for Q2 GDP will be released July 1st, and the second estimate on August 29th).

Assuming a 1.0% growth rate in Q2, GDP would have to be at a 3.2% annual pace in the 2nd half to reach the FOMC's lower forecast (3.8% growth to reach the higher forecast).  More likely the FOMC will revise down their forecasts in September.