Deutsche Bank's Lavorgna Follows Revision Suit , Takes Q2 GDP Estimate Down To 1.1%
Our expected economic groupthink revision by the sellside "strategists" is accelerating, as now even permabullish CNBC permaguest Joe LaVorgna "takes the knife" to his Q2 GDP estiamte. Yet despite presumably seeing the light, he only cuts Q3 and Q4 estiamtes to 3.0% and 3.3%, still hundreds of bps higher than Goldman, and even worse when compared to reality. David Bianco and his stratospheric GDP will stick out like a speedoless nudist in the middle of the liquidity ocean when the economic tide finally goes out. Luckily, Bianco has no credibility to begin with so the concept of discrediting surely does not apply.
Taking a Knife to H2 GDP; Fed on hold longer
We are lowering our growth forecast and pushing out the anticipated timing of Fed hikes. The June international trade figures were much weaker than what both we and the Commerce Department had assumed, and it was not due to petroleum, which can often be a major monthly swing factor. In the June data, exports were down 1.3%, due mostly to lower capital goods excluding autos, while imports were up a sizeable 3.0%, largely on consumer goods and autos. The net effect was to push the June trade deficit from a modestly lower revised May reading of -$42.0 billion (was -$42.3 billion) to -$49.9 billion, the largest monthly trade deficit since October 2008 (-$59.4 billion). What is strange about the June trade numbers is that the deficit is widening while the inventory build is getting revised lower. Oftentimes, a rise in imports on the back of stronger domestic demand leads to higher rather than lower inventories—it now appears inventories will barely be higher in Q2 than their $44 billion increase in the prior quarter. Nonetheless, the data have an impact on our 2010 second half GDP forecast.
The net effect of this morning’s trade data is for us to further trim our estimate of Q2 real GDP. Less construction, inventories and net exports point to a sharp downward revision to Q2 real GDP growth from +2.4% to just +1.1%. This in turn creates a high hurdle for a large gain in output this quarter, which had been our expectation. Absent meaningful private sector job growth, a quarterly delta of 350 bps on sequential quarterly real GDP from +1.1% to +4.6% is too aggressive. Therefore, we are marking down our second half growth forecast as follows: Q3 real GDP has been cut from +4.6% to +3.0% and Q4 real GDP has been cut from +3.8% to +3.3%. This lowers Q4 over Q4 2010 real GDP growth from +3.6% to +3.1%, which is still above trend. We are not trimming our 2011 real GDP forecast at this point—it remains at +3.3% as measured on a Q4 over Q4 basis. Less GDP growth and lower employment prospects implicitly mean a longer period of near zero interest rates, and yesterday’s very dovish FOMC statement only reinforces this. Consequently, we are pushing out the expected timing of rate normalization from Q1 2011 into the second half of next year. We see the fed funds rate at 1% by the end of next year compared to 2.0% previously.