Second-Quarter GDP Estimate: Slower Growth, Yet Potential Surprises

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The eagerly awaited first estimate of second-quarter gross domestic product (GDP) is set to be released on Thursday morning. Although economists predict a slowdown compared to the first quarter, the results may still hold some positive surprises.

Expected to be made public before the markets open, the Bureau of Economic Analysis will unveil the first estimate of second-quarter GDP. According to economists surveyed by FactSet, GDP is projected to rise by 1.5% in the second quarter, marking a decrease from the previous quarter’s 2% growth.

The consensus among economists is that growth in consumer spending will experience a slowdown. The Census Bureau reported that retail sales in June increased at a slower pace due to persistent high inflation and rising interest rates, which continue to impact consumers’ purchasing power.

While consumers remain willing to spend, they have become more cautious and selective in their expenditures due to elevated prices and stricter financing conditions. As a result, consumer spending momentum has considerably slowed down after a robust start to the year, as highlighted by EY chief economist Gregory Daco.

Notwithstanding economists’ expectations of a decline in GDP, the Federal Reserve Bank of Atlanta’s GDPNow model, which estimates real GDP growth based on available economic data, anticipates a more positive outcome. It predicts GDP growth of 2.4% for the second quarter. The Atlanta Fed pointed out that their projection was adjusted following the release of the housing starts report from the Census Bureau on July 19, which led them to increase their expectations for growth in residential investment during the second quarter.

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Economic Growth Forecast

Morgan Stanley economist Ellen Zentner predicts a boost in nonresidential investment, highlighting another positive aspect for the economy. In her report on July 21, Zentner acknowledges that although consumption is slowing and core inflation remains stubbornly high but decreasing, there is a slowdown in job growth and the housing market correction has hit rock bottom. However, she points out that industrial policy is generating a manufacturing and nonresidential construction boom, which was previously underestimated.

Zentner forecasts a second-quarter annualized GDP growth rate of 1.8%. This growth rate will be revealed in the upcoming GDP report, which will be the first significant economic data following the Federal Reserve’s meeting on Tuesday and Wednesday. During this meeting, the bank decided to raise the fed-funds rate by a quarter-point, resulting in a range of 5.25% to 5.5%.

Should the actual data deviate from economists’ expectations and indicate a weaker economy, it could potentially have negative implications for the markets. Lingering concerns of a looming recession exacerbate this scenario.

While there have been improvements in consumer confidence compared to six months ago, Bill Adams, Comerica Bank’s chief economist, warns that the Fed’s tight monetary policy will persist throughout the second half of 2023. Consequently, this will limit activity in interest-rate sensitive sectors such as manufacturing and construction.

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