Filed under: Economy
While all eyes will be on the upcoming July unemployment and payrolls on Friday, August 1, the other big economic report during the week will of course be second-quarter Gross Domestic Product (GDP). We would remind our readers that economists and government watch groups have all been calling for a snap back recovery in GDP after the -2.9% drop in the first quarter of 2014.
The question to ask is if that GDP snap back thesis is going to hold up or not. Our assessment was that the Durable Goods report for June just saved the GDP report. That being said, two major brokerage powerhouses downgraded their estimates of GDP on Friday after the Durable Goods report — Goldman Sachs lowered its GDP forecast to 3.0% from 3.1% and Morgan Stanley lowered its estimate to 3.2% from 3.3%.
When economists downgrade GDP that is bad, right? Well, our take is that the Durable Goods report still saved GDP for the second quarter. The core order reading for nondefense capital goods, ex-aircraft was up 1.4% in June after having been negative in April and May. Consider this as well:
- Durable Goods rose by 0.7% in June on the headline report — May was down 0.9%, and April was up 0.8%.
- The ex-Transportation Durable Goods was up 0.8% — after being effectively flat in May and up by 0.4% in April.
What you also have to consider is that inflationary readings also started to tick up in June. This may be abated if oil and food prices fall, but the numbers were a bit heated. And the last reading on retail sales turned out to not be the most GDP-friendly when you consider that around 70% of GDP is measured under consumer spending.
Also, the Chicago Federal National Activity Index showed that growth around the nation decelerated in June. The Beige Book showed the trajectory of growth in each region. America is still awash in capacity as well, as capacity utilization remains stubbornly under the 80% mark.
Bloomberg has the consensus GDP reading at 3.1% for the second-quarter. That consensus drops down to 2.0% if you use the price index. Our estimate (actually a guesstimate) is that GDP will have grown closer to 2.5% in the second quarter, with the price component likely short of the 2.0% consensus.
Goldman Sachs and Morgan Stanley lowering their estimates really is of no concern here as far as we are concerned — we figured they were too high anyhow. The question should really be centered around whether 3% is a realistic target when you had sub-optimal readings throughout the quarter after a -2.9% final drop in GDP in the first quarter. Our guess is that it is not.
Stay tuned, we will all get to know the verdict on Wednesday.
Filed under: Economy