And to think they cut it from 3% to 2.5% just a week ago. Michael Feroli, take it away...
Revising down Q2 GDP, again
When we revised down our estimate of Q2 GDP growth last week to 2.5% we noted that the risks to this quarter were still to the downside. Given the hard activity data we've received since then -- particularly the auto sales and construction report -- it looks like those downside risks are being realized, and we are lowering our Q2 projection to 2.0%. Even with this revision we'd assess the risks as still a little to the downside. Most of our downward revision in Q2 is located in consumer spending, where we think growth this quarter is tracking close to 1.5%. If our new estimate for Q2 is realized, GDP growth relative to a year-ago would be only 2.4%, implying almost no closing of the output gap over the past year -- an abysmal performance given that the output gap is arguably greater than 5% of potential GDP, or less arguably, that there are still almost 14 million unemployed workers.
As always, the more important issue is what happens next quarter. We are leaving our Q3 GDP call at 3.0%. In last week's revision we noted some upside risk to the next quarter call, based in part on the potential for a bounceback in manufacturing and motor vehicle production as Japanese supply chains normalized. Risks are becoming more balanced. Guidance on Q3 auto production -- while still upbeat -- appears to be turning a little less bullish. More generally, we need to stay alert to whether weaker first half growth feeds into materially softer labor market activity -- the one area where first half economic performance was solid -- which could in turn propagate the current soft patch on into the second half. Barring that, our best guess remains that industrial activity rebounds and the second half picks up some after what has been an ill-fated first half.
Our forecast implicitly assumes the debt ceiling issue is resolved in a manner which does not see a technical default of the US Treasury. Of course if that assumption were not to hold all cards would be off the table and we almost certainly have to pencil in a much more severe downgrade to our growth forecast. Our Fed call is unchanged and continues to look for a first hike in 1Q13.