Carlos Barria | Reuters
Economists expect that the economy barely grew in the second quarter, and some predict that it may have actually contracted.
It is estimated that the economy has grown by several tenths of a percent. Goldman Sachs expects a 1% increase, while Moody’s Economics forecasts a 1% decrease.
The slow growth forecast comes on the heels of the 1.6% decline in the first quarter. But there are plenty of expectations for a contraction in the economy, including the Fed’s now track of GDP in Atlanta, which was minus 1.2% for the second quarter.
This would make it the second negative GDP report in a row and is one sign that the economy is in recession. However, economists are keen to point out that a strong labor market and other factors make a recession unlikely right now. They also noted that the National Bureau of Economic Research, the official arbiter of recession calls, is also not expected to announce it now.
Federal Reserve Chairman Jerome Powell said on Wednesday that he does not believe the economy is in a recession.
“Let’s say it’s negative. The headline all over the place would be ‘Recession.’ That’s not how markets think about it, but you’ll see people screaming ‘Recession,'” said Michael Schumacher, Wells Fargo’s head of macro strategy. There is debate about it…it will be more important to political patterns than the market.
Some economists raised their forecasts on Wednesday, ahead of the second-quarter report, after the monthly durable goods report came in better than expected and advanced trade data showed the trade gap narrowing significantly. Durable goods rose 1.9% in June after a smaller 0.8% advance in May.
Economists at Goldman Sachs boosted their forecast for gross domestic product to 1% from 0.4% after the data.
Mark Zandi, chief economist at Moody’s Analytics, said he now expects minus 1%; Before the data it was negative 1.3%. But he also doesn’t think a negative number, when combined with a first-quarter contraction, will indicate a recession.
“I think it’s hard to see a stagnation when we created so many jobs. There are record vacancies,” he said, noting that the job growth rate was about 500,000 jobs per month. “He doesn’t agree with the idea that the economy is in a recession. It’s every industry in every corner of the country that’s seeing strong job growth. It’s not just a recession.”
The economy added 372,000 jobs in June.
Zandi noted that negative growth numbers are likely to be revised upwards, and the causes of deflation will not last. The slowdown can be linked in part to the impact of Covid on the economy, which has led to faltering supply chains and inventory issues.
“The weakness in first-quarter and second-quarter GDP goes mainly to trade and inventories, and these are temporary factors in GDP,” he said. “They swing the GDP number from quarter to quarter, but they are not constant sources of growth or a weighting on growth.”
Zandi added that trade subtracted 3.2 percentage points of GDP in the first quarter, but should be a positive factor in the second quarter.
“We had big gains in inventory in the first quarter…I think this is due to disruptions in trade related to the pandemic and the timing of things,” he said. “Inventories rose significantly in the first quarter… We will see some build-up in inventory in the second quarter but not big gains in inventory. So, that’s a drag on GDP.”
Economists at JPMorgan raised their growth forecast from 0.7% to 1.4% after economic data on Wednesday.
“The most significant surprises were related to trade and inventories, as June’s trade deficit came in narrower than we expected and nominal inventory changes for June were higher than expectations,” JPMorgan economists wrote in a note.
The nominal deficit in goods trade narrowed to $98.2 billion in June from $104 billion in May, and exports rose 2.5% as imports fell 0.5%. The trade data is not complete, as it does not include services, but JPMorgan economists said they now expect an improvement in the trade deficit to mean more growth.
“We believe that the existing data strongly suggest that the real trade deficit narrowed significantly in the second quarter [which we now think added 1.6%-pts to 2Q real GDP growth],” they noticed.
Kevin Cummins, chief US economist at NatWest Markets, said the trade data supports his view that the economy grew at a 1.5% pace in the quarter.
“It doesn’t mean you can’t get a negative print but that’s less likely,” he said. Cummins also stressed that two consecutive negative quarters do not mean the economy is already in a recession.
“If we get another negative quarter for the second quarter, they call it a technical recession,” Cummins said. “The problem with that is not the way the National Bureau of Economic Research looks at things. … They look at the monthly data. They will look at employment. They will look at personal income, consumption, industrial production, all the monthly data and decide whether the economy is in a state contraction or expansion.