Next week’s release of the initial second-quarter US GDP data is widely expected to be a horror show. Is relief on its way in Q3?
The only reasonable answer, of course: no one knows, although it’s encouraging that there’s still a degree of optimism about the recovery prospects for the July-through-September period. Obviously, the critical variable remains the coronavirus and how the disease evolves in the weeks ahead — a trend that will continue to cast an overwhelming influence on economic activity. To reduce this down to a simple formulation: if new cases and fatalities trend down (up), the odds of a Q3 economic rebound improve (deteriorate).
The other critical variable: progress on Covid-19 treatments and an effective, widely available vaccine. The latest advances in testing appear promising, but there’s still a long and winding road ahead to transition from the lab to the general population.
With that in mind, let’s take a quick tour of the numbers to see where we stand right now. As a baseline, let’s begin with the latest expectations for next week’s Q2 GDP data. The Bureau of Economic Analysis on July 30 is expected to report a shockingly deep decline in economic activity for the April-through-June period, due to the coronavirus lockdown that effectively shuttered the nation. The Atlanta Fed’s GDPNow model, for example, sees output falling by a dramatic 34.7% (quarterly change at annual rate) in Q3, as of the July 17 estimate.
Depending on the source and the model, the outlook for Q3 varies but only in terms of the range of what is generally expected to be a steep loss. The New York Fed’s July 17 nowcast projects that output will drop 14.3% while the St. Louis Fed’s GDP nowcast estimate is a much deeper Q2 decline: -32.0% (as of July 17).
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Surveys of economists also expect an ugly Q2 report. The Wall Street Journal’s July poll of dismal scientists, based on the average estimate, calls for a hefty 31.9% drop in second-quarter output.
With Q2 widely written off as a massive loss, the main debate and focus at this point centers on two questions: Will there be a rebound in Q3? If so, how strong will the snap-back be?
The best guesstimates on this front remain upbeat. Although the forecasts are subject to change, depending on the coronavirus data in the weeks ahead, for now there’s a widespread view that GDP in the current quarter will recover some of the Q2 loss.
The NY Fed’s current Q3 nowcast, for instance, estimates that output will rise 13.2%. Now-casting.com’s projection (as of July 17) is higher at nearly a 20% bounce for US output during July through September. The Conference Board’s July 8 estimate is anticipating a similar gain of a bit more than 20% for Q3.
The economics team at Wells Fargo Securities last week noted that “for the most part, economic data continue to surprise to the upside and do not yet rule out prospects for that elusive V-shaped recovery.” A hard-data example: last week’s retail sales report for June. Citing the chart for consumer spending through last month, Wells Fargo’s economists advise that the bounce in retail sales “is about as close to a V as you get.”
There are other indicators skewing positive too, including a bounce in payrolls and industrial activity. It doesn’t hurt the case for thinking optimistically that new reported cases of coronavirus cases in the US, following the latest surge to a record high, is hinting at the possibility that the upside trend is peaking (as of data through July 20), based on data reported by Johns Hopkins University.
The outlook for Q3 may be relatively upbeat, but it’s important to recognize that the optimism is fragile, in part because of ongoing uncertainty about coronavirus and other the blowback for key economic indicators that continue to flash warnings. Exhibit A for caution: weekly jobless claims, which continue to rise by an extraordinary degree.
New filings for unemployment insurance last week increase by one-million-plus for a 17th straight week. The persistent rise in claims is increasingly worrisome for the economic outlook, economists warn.
“There are clear signs that the longer-term damage is beginning to mount, with permanent layoffs beginning to climb, and the flow of workers from employment to unemployment still elevated,” Michael Pearce, senior US economist at Capital Economics, advised in a research note last week. “Moreover, absent a vaccine, the need for ongoing physical distancing will prevent a full recovery.”
So, yes, the odds for solid Q3 rebound remain encouraging, but there are plenty of reasons for caution. It’s safe to say that the US economy remains in a precarious state. The macro trend may be turning positive in some degree – the Philly Fed’s ADS business cycle index is the poster boy for this upbeat view at the moment. But with low confidence for what happens next, particularly in the fall and winter, the raw truth is that the economic outlook is still vulnerable to dramatic revisions.
Managing expectations is always dependent on incoming data, of course. Rarely if ever has this reality been in the acute state that currently prevails.
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