Tomorrow's "Other" Event - A Sub-1% GDP Report

In addition to tomorrow's 10am headline event, which most likely will not tell us anything we don't already know, a just as important data release will occur at 8:30 am, when the BEA releases its second Q2 GDP estimate. Wall Street, which is now proven to be beyond incompetent when predicting GDP data (just recall the first Q2 GDP number fiasco), anticipates a number of 1.1%, down from the preliminary 1.3% announced last month. What is disturbing is that the far more credible analysts at Stone McCarthy, a firm that does not sell bonds or stocks, and just so happens is far more accurate than most sellsiders, now predicts a stunning 0.7% first revision to GDP. And remember: this number comes 90 minutes before Bernanke comes off embargo. What will happen to the market if the algos suddenly realize that the economy is currently experiencing its first sub-0% growth GDP quarter (the first condition of a recession), and there is no help coming from Bernanke. Furthermore, Wall Street has already started revising down its August NFP data, due out the first week of September. So with the next FOMC meeting on September 20 (followed by the November 1-2 two day meeting, during whicha week ago the Fed formally announced QE2), how will the market react knowing there is no help in sight for at least 4 weeks? We doubt it will be favorable.

From Stone McCarthy:

We look for the 2nd estimate of Q2 GDP (Friday 8:30am) to be revised downward to only +0.7% from the Advance estimate of +1.3%.


Our forecast compares to the +1.1% median estimate from the Bloomberg survey of 80 economists. That said, we are not alone in our expectations as about 8 of the 80 economists from the survey are in the +0.7%/+0.8% range.

About 1/2 of the anticipated downward GDP revision appears to be attributable to inventories, especially at the Wholesale level.


Final Sales are projected to be revised lower to 1.0% from 1.1% per the Advance release.


Exports should be revised downward, while imports are likely to be revised upward, a combination that should render a material downward revision to Aq Net Exports.


If there is good news to be included in this revision it is that PCE is likely to be revised upward, stemming from an upward revision to the retail control grouping.


Thus, household demand should look better than earlier, while inventories will look leaner. Typically, this is a combination that would be associated with an upward nudging of the next quarters GDP forecast.

Typically yes, except in this case when the stock market crashed and burned in the middle of Q3, which will lead to what we believe is the first negative growth quarter since the last recession/depression formally ended, at least according to the NBER.