A 5.3% GDP Print On Deck?

There may be fireworks on Friday when the US releases the first estimate of Q2 GDP.

With most banks expecting a print of 4% or more, Barclays has bucked the trend, and over the weekend raised its official Q2 GDP estimate to 5.0%, thanks to the late-cycle fiscal boost. But the final number could be even higher: as Barclays economists write, "data received this week were strong, on balance, and boosted our Q2 GDP tracking estimate by a cumulative three-tenths, to 5.3%."

Some details on how they get there:

The data point to solid momentum in domestic activity in Q2, even as trade looks poised to contribute substantially to growth. June retail sales rose by a solid 0.5% m/m at the headline level, but were softer than expected at the core level. However, this was more than offset by strength in non-core categories and substantial upward revisions to the May data at both the headline and core levels.

Taken together, our PCE tracking estimate was boosted three-tenths, and pushed our Q2 GDP tracking higher to 5.2%. Industrial production staged a strong rebound in June, driven by manufacturing production. The data pushed our PCE tracking estimate higher by two-tenths, and also led us to revise our inventories estimate higher. In all, our GDP tracker was boosted by a tenth, to 5.3%.

Housing starts disappointed in June, falling by 12.3% amid declines in both single- and multi-family categories. In addition, there was a net downward revision of 23k to the data for April and May. The report points to lower private residential construction spending in Q2, and led us to revise our residential investment tracking lower for Q2. However, our GDP tracker was left unchanged at 5.3%, after rounding. 

Needless to say, a 5.3% GDP print would be a stark outlier for an economy which most analysts concede is late cycle, and which Goldman expects to eventually fade to sub 2% over the next 24 months. In fact, the number would be the highest print since 2003.

 

And yet, there is a "but." As Morgan Stanley noted on Sunday, 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.

Some more details on why trade wars provide a brief boost to GDP followed by a steep decline:

The ‘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, Morgan Stanley sees net trade and inventories making up 2.2% of its 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.

As an example, the bank notes that US GDP was +4.6% in 4Q11, then averaged +1.6% for the next five quarters.

And while Trump will be delighted to take credit for the one-time surge in the US economy, even his economic advisors will realize that Q2 growth is merely pulling demand from the future (a popular theme in this economic cycle).

The problem for Trump, the mid-term elections, and his escalating trade war with China, is that the Q3 GDP print - which by all count will be far weaker - will be released in three months time, just weeks before the midterm elections, and will reveal a sharp slowdown in the economy, one which will be promptly utilized by China, and its goalseeked GDP, to insinuate that Beijing is now winning the trade war.

Which probably means that if Trump wishes to deal a knockout blow to Beijing, he has a roughly 3 month window in which to do it; in that case expect a sharp acceleration of tariffs and trade tensions in the dog days of summer...