By now it is no secret that Q2 GDP is a complete scratch, likely coming at under 2%, meaning that the economy contracted in real terms (even though back in January every Wall Street economist expected a 4% growth rate at this point). Needless to say, those who have been reading Zero Hedge know that Q3 and Q4 will suffer the same fate. Everyone else who has been holding out in hope that some mythical and mysterious car buying force will appear out of somewhere and can now relax. It isn't. Here is the first official Q3 GDP downgrade, courtesy of JPM's Michael Feroli. We fully expect every other clueless Wall Street lemming to follow suit in minutes.
Read em and weep:
We are revising down our projection for the growth rate of real GDP in Q3 from 3.0% to 2.5%. Obviously there's not a whole lot we know right now about third quarter growth, but one thing we do know is that the composition of second quarter growth implied a fairly large amount of inventory building, which should weigh some on output growth in the current quarter. Given the data was have through May it appears real inventories were built up last quarter at around a $65 billion annual rate; this is a fairly strong pace of stockbuilding even in a time of healthy final demand growth, but of course final demand growth has been quite soft as of late. The suspicion that the inventory building was unanticipated by business, and unwanted, receives some validation in the customers' inventories index in the June ISM survey, which reported an assessment that inventories were getting to flush levels.
We still expect that Q3 growth will be better than Q2 growth -- which is currently tracking a little to the soft side of our 2.0% estimate -- as we still see the two positives for Q3 largely intact: a rebound in vehicle production and a decline in energy prices freeing up some consumer purchasing power. To be sure, both of these positives are looking a little less shiny than they did a few weeks ago. Revised Ward's vehicle production schedules are still boomy, but less so than the previous estimate (CSM schedules will be released tomorrow), and the decline in retail gas prices seems to have stalled for now. Nonetheless, Q2 is a fairly low hurdle to cross, and we still believe that Q3 can beat the prior quarter's growth number.