by Brian S. Wesbury â Chief Economist, Robert Stein, CFA â Deputy Chief Economist, First Trust Portfolios
To many investors, this weekâs GDP report is more important than usual. Â The reason is that real GDP declined in the first quarter and might have declined again in Q2. Â If so, this could mean two straight quarters of negative growth, which is the rule of thumb definition many use for a recession.
We think these investors are paying too much attention to the GDP numbers; the US is not in a recession, at least not yet. Â Industrial production rose at a 4.8% annual rate in the first quarter and at a 6.2% rate in Q2. Â Unemployment is lower now than at the end of 2021. Â Payrolls grew at a monthly rate of 539,000 in the first quarter and 375,000 in Q2. Â If we were already in a recession, none of this would have happened. Â Thatâs why the National Bureau of Economic Research, the âofficialâ arbiter of recessions, uses a wide range of data when assessing whether the economy is shrinking.
In addition, itâs important to recognize that once a year the government goes back and revises all the GDP data for the past several years. Â That happens in July, including with the report arriving this Thursday. Â Given the strength in jobs and industrial production, it wouldnât surprise us at all if Q1 is eventually revised positive.
In the meantime, we are forecasting growth at a +0.5% annual rate in Q2. Â Hereâs how we get there.
Consumption: Â âRealâ (inflation-adjusted) retail sales outside the auto sector grew at a 2.2% annual rate, and it looks like real services spending should be up at a solid pace, as well. However, car and light truck sales fell at a 19.7% rate. Â Putting it all together, we estimate real consumer spending on goods and services, combined, increased at a modest 1.2% rate, adding 0.8 points to the real GDP growth rate (1.2 times the consumption share of GDP, which is 68%, equals 0.8).
Business Investment: Â We estimate a 5.5% annual growth rate for business equipment investment, a 7.5% gain in intellectual property, but a 4.0% decline in commercial construction. Â Combined, business investment looks like it grew at a 4.4% rate, which would add 0.6 points to real GDP growth. Â (4.4 times the 14% business investment share of GDP equals 0.6).
Home Building: Â Residential construction looks like it contracted at a 4.0% annual rate. Â Mortgage rates should eventually become a headwind, but, for now, it looks like an increase in spending on construction was more than accounted for by inflation in construction costs. Â A decline at a 4.0% rate would subtract 0.2 points from real GDP growth. Â (-4.0 times the 5% residential construction share of GDP equals -0.2).
Government: Â Remember, only direct government purchases of goods and services (and not transfer payments like unemployment insurance) count when calculating GDP. Â We estimate these purchases â which represents a 17% share of GDP â were roughly unchanged, which means zero effect on real GDP.
Trade: Â Exports have surged through May while imports, after spiking late in the first quarter, have remained roughly flat so far in Q2. Â That means a smaller trade deficit. Â At present, weâre projecting net exports will add 1.0 point to real GDP growth, although a report on the trade deficit in June, which arrives on July 27, may alter that forecast.
Inventories: Â Inventories look like they grew at a slower pace in the second quarter than they did in Q1, suggesting a drag of about 1.7 points on the growth rate of real GDP. Â However, just like with trade, a report out July 27 may alter this forecast.
Add it all up, and we get 0.5% annual real GDP growth for the second quarter. Â Monetary policy will eventually tighten enough to cause a recession, but that recession hasnât started yet.
Brian S. Wesbury â Chief Economist
Robert Stein, CFA â Deputy Chief EconomistÂ
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