Goldilocks On The Rocks: Why Next Week's GDP Will Be "The Last Best Print"

Authored by Andrew Sheets, Morgan Stanley Chief Cross-Asset Strategist

Next week the US Department of Commerce reports its advance estimate of 2Q GDP. It’s likely to be a whopper. Our US economics team expects it to register at +4.7%, and given the unusually large number of moving parts at work this quarter, a 5-handle is possible. A few days later, the June reading of US PCE could show a slight downtick in core inflation. Robust growth and modest inflation; what could be better?

Try not to get carried away. Amid the inevitable cries of ’Goldilocks’, a more important story lies below the surface. An unusually large number of one-off factors appear to have boosted 2Q GDP, many of which are directly related to escalating trade concerns. As companies and countries race to secure supplies that may become expensive later on, exports have surged and inventories have swelled. If these trends are one-time adjustments (and our economists believe they are), the ‘payback’ in 2H could be significant. Enjoy the 2Q GDP number, which may be the last best print for a while.

2018 has seen a steady increase in trade tensions, and trade actions, between the US and its trading partners. The US slapped tariffs on washing machines and solar panels in January, on steel and aluminum in March, and on US$34 billion of goods from China on July 6. In response to these measures, China and the European Union have announced countervailing tariffs of their own.

For Michael Zezas and our US public policy team, this fits with a narrative of continuing escalation in trade tensions, a trend we expect to persist until it comes up against greater political or market pressure. As we have yet to see either, companies are facing this new backdrop with a familiar mantra: ‘Hope for the best, prepare for the worst’.

At least that’s what Ellen Zentner and our US economics team see when they peel back the US data. As Ellen noted in a recent NYT op-ed, countries have dramatically increased the volume of goods they import from the US, likely with a view towards securing goods before new duties are applied. If you don’t believe us, we’re open to other suggestions on why US soybean exports were up almost 9,400% annualised over the last three months, or why the export of crude and fuel oil surged by 244% over this period.

In aggregate, this ‘stockpiling’ in exports could be responsible for 1.5 percentage points of our 4.7% 2Q GDP estimate.
‘Stockpiling’ also appears to be at work for US companies, albeit to a more limited extent. The inventory build in 2Q is tracking at +US$38 billion, versus a +US$10 billion rate in the prior two quarters. And what’s more interesting is the areas where those inventories are building, which have material overlaps with trade: electrical goods, machinery equipment, motor vehicles and parts.

In total, our US economists see net trade and inventories making up 2.2 percentage points of our 4.7% US GDP estimate, the highest combined contribution since 4Q11. Their concern is that since they are one-off adjustments, both contributions are unsustainable and represent a pull-forward of demand that will need to be given back. US GDP was +4.6% in 4Q11, then averaged +1.6% for the next five quarters.

The latest round of trade tensions may also matter for inflation. Despite all the ink spilled on trade this year, the impact on end prices appears minimal. But this may be set to change. My colleague Guneet Dhingra notes that, so far, tariffs have focused on the components of production, which tend to take time to work their way into final prices. But when tariffs target consumer goods, the impact can be rapid. Remember those tariffs on washing machines? The ‘laundry equipment’ category of CPI is up almost 15% year on year.

Why does this matter? Of the US$34 billion in items targeted in the initial set of China tariffs, 3% were consumer goods. In the next US$200 billion set of proposed items, 33% are consumer goods – a much larger share of a much larger number. And if the tariff list expands to the remaining US$250 billion of Chinese goods, of which 60% are consumer goods, this will result in a more acute impact of incremental tariffs on CPI.

What does this mean for markets? While next week’s print will tempt with a narrative of strong growth and modest inflation, we think that 2H will follow a different storyline, with decelerating growth and rising inflation across major regions. More tactically, we’re also moving out of a July reporting period that has historically been supportive of risk into an August-September stretch that is usually one of the most challenging.


any_mouse Sun, 07/22/2018 - 17:08 Permalink

What does this GDP mean for The People? Zip.

Company Nation. Rockefeller (nee Levinson) Dream.

Paid in scrip redeemable at Company stores.

Living in Company financed housing.

Driving Company financed vehicles.

Consuming Company produced consumables.

Investing in Company owned equities.

GDP exists to make you think you share in prosperity.

techpriest any_mouse Sun, 07/22/2018 - 17:26 Permalink

You could have lived in a house that would have been considered nice in the 70s, but is "small" now, but you had to go with the 2500 square foot house.

You could have gone with a 5-7 year old car that was fully depreciated but still has half of its life, but you had to lease a new car.

You could have bought a $30 inflatable bed until you could pay cash for a $400 bed, but you had to finance the nice bed.

If you can give up the flash and image from ~25-35, you can be entirely debt free and well on your way to other forms of freedom. Don't care about what others think.

In reply to by any_mouse

Pop3y3too Sun, 07/22/2018 - 17:09 Permalink

This is exactly why I finally bit off on upgrading to a 65" 4k LG in June.


I'm guessing the cost of consumer electronics is about to experience some "growth" very soon and my current screen, 8 years old, was getting a little long in the tooth.

Pop3y3too Solosides Sun, 07/22/2018 - 20:54 Permalink

Oh, I don't watch TV on it. It's just a PC monitor. The old 55" became my surveillance system monitor and hangs on the wall atop the 65" PC monitor.


I upgraded the PC, too, while I was at it with a "gaming" Dell, for the same impending price hike reason. Even if the prices don't rise, I consider those a good investment.  There are few things in life I use as much as that set up. The bed comes in a close second, followed by the couch, my Trek Domane, and my good running shoes.

In reply to by Solosides

snblitz Pop3y3too Sun, 07/22/2018 - 21:45 Permalink

I was in a home depot parking lot loading fairly large windows into my truck.

Some "guys" pulled up in an SUV and asked me if a wanted a free 75" HDTV that had been pulled from a local renovation job.

Sad to say, I do not watch TV and had no use for it which I told them.

Apparently, 75" HDTVs are not worth much.

In reply to by Pop3y3too

The Real Tony Sun, 07/22/2018 - 17:14 Permalink

When the DXY dollar index rises above the 95 level and China devalues the yuan all the data on GDP and inflation will both come in down the toilet bowl drastically lower than the lowest range of estimates. Happens every time and the reason is simple... all the data is fabricated.

valerie24 Sun, 07/22/2018 - 17:22 Permalink

Fearless prediction. If GDP hits, the SM rallies, if GDP misses, the SM rallies

Gold will go down regardless.

They've got the whole shit and shebang on cruise control

Nobody For President Sun, 07/22/2018 - 18:48 Permalink

Well, I did MY part, replaced my 2006 Toyota when it's computer center died with a 2000 Toyota Rav 4 with a 1/4 million miles on her (and a new rebuilt engine from a local mechanic I trust) for a big $4 grand - figure it's good for another 50 to 100 K miles if I treat her right.

arrowrod Sun, 07/22/2018 - 19:19 Permalink

Do any of these finance guys ever go to a factory?  My buddy is getting parts from China for $40.  Selling them for $500.  These parts are made on CADAM.  The CADAM software can easily be transported to the U.S.

CADAM is old news.  3D printing is here.  And, on it goes.

What are ZHers buying these days? My house and garage are stuffed to the rafters with must haves.  Luckily, Home Depot is 1/2 mile away, 'cause, with so much shit, I can't find anything, so buy new.  Then when I put the new stuff away, I lay it next to the thing I couldn't find in the first place.

I'm into battery powered bicycles, so called e-bikes.  The high tax states have already passed a myriad of restrictive laws.  NYC fines $500 and confiscates your e-bike, based on police whim.  Florida lets me do pretty much whatever I want.  No license, registration, helmet.  Hope I don't get killed by a senior citizen or cell phone millennial.  I've been riding for 70 years, so am pretty cagey.  


vladiki Sun, 07/22/2018 - 19:32 Permalink

GDP's a ridiculous measure of national wellbeing and sooner we scrap it the better.  It puts a value on the parking lot but prices the field it's been put on at zero; prices the new car you buy at cost but the car you've junked at zero no matter its actual residual worth; puts a price on the hole you dig and another price on your filling it in.  It's an absurdity.  They don't even routinely publish it on a per capita basis so if you double the population and double it, no one's better off but you've "doubled the GDP!!!".  And if they do publish per capita, it's "average".  But we know that the past 25 yrs, all the increase has gone to the top 10% ... so they've gone up heaps and the the 90% hasn't budged, but "average GDP is up by X%!!!". 

Measuring what really matters (a feeling of belonging, having a respected place in the mechanism, a measure of contentment, opportunity, hope, fulfillment etc) is very hard.  And anyway, what actually IS the point of our striving?  Now that religions largely gone, nobody knows.  So we settle for wanting MORE OF EVERYTHING, when we know already that's not the answer .. ENOUGH is what's important ... and imbecilic measures of national achievement like  GDP!   320 million of us = 32 billion IQ points and that stupidity is the best we can come up with?

snblitz Sun, 07/22/2018 - 21:40 Permalink

they are one-off adjustments,

If I stock pile 3 months worth of toilet paper, sure I "pulled forward" 3 months worth of purchases, but in 3 months I will have to buy more.

In other words, pulling purchases forward does not the change the amount of an item purchased over the long term.

So it might make GDP look strong and then weak, but what then?  GDP will look strong again when I purchase another 3 months worth of toilet paper.

Averaged over a longer period, nothing unusual is happening.