From 2.4% To 1.1% And Dropping - Q2 GDP Gets Closer To Reality With Each Passing Day
As we pointed out earlier today, today's latest deterioration in yet another overoptimistic assumption by the BEA, in the form of the balance of trade, means that the next GDP revision will likely be sub 1%, and may ostensibly drop to negative, confirming that the double dip, at least for NBER purposes, started sometime between April and June. Confirming our skepticism is JPM's Michael Feroli who now believes that real Q2 GDP is trending at a 1.1% rate, less than half the official 2.4%, which, as readers will recall was expected by a battery of Ph.D.-clad optimists to come out to 2.7%. Less than two weeks after the announcement, it becomes clear that the world's "smartest" economists were off by 60%. And we are confident this is not the end of the downward revisions.
From JPM's Feroli:
The trade balance widened out to $49.9 billion in June from $42.0 billion in May, as imports leaped 3.0% while exports slid 1.3%. The decline in exports was not particularly striking, as it followed a 2.5% increase in May. It was rather the increase in imports, which followed a 2.8% increase in May, that was more eye-catching. The surge in imports was even stronger in real terms: up 4.8% in June after a 2.9% increase in May, the strongest two-month run on record. This strength in real imports was mostly in consumer goods, which are up 15.6% over the last two months. Given this end-use product, it is not surprising to see Chinese imports still running strong, up 37% over a year-ago. This lift to imports may represent the last push of Chinese exporters ahead of the July 15 expiration of their VAT rebate.
The increase in the trade deficit was even wider than was initially assumed in the first print of Q2 GDP, and implies growth last quarter was about 0.3%-point softer than initially reported (there was a partial offset in the capital goods balance). Together with the earlier-reported June inventory data, our best estimate is that when revised Q2 GDP is reported on August 27, it will look closer to 1.1%, down from the 2.4% initially reported. While this is a disturbingly low number, it should be pointed out that very little of the incoming data imply downward revisions to domestic final sales. The fact that inventories were weaker last quarter implies, if anything, more support for output gains in the third quarter. To a lesser degree the same could be said about the strength in import growth last quarter, provided that growth was front-loaded and we get some payback in the form of weaker import growth in Q3.
The data do raise one puzzle: last quarter real imports were up at a 23% annual rate and domestic manufacturing output was up at an 8% pace. At the same time, core retail sales advanced at less than a 2% rate and inventory building now looks weaker than the quarter before it, so its not obvious where all these goods are going.