US Q2 Growth Set To Accelerate As Trade-War Risk Lurks

The trade war that appears to be escalating may bring headwinds in the second half of the year, but second-quarter US GDP growth remains on track to accelerate, based on several forecasts compiled by The Capital Spectator. The current median projection calls for real GDP growth in Q2 to rise 3.1% (seasonally adjusted annual rate) – a solid improvement over Q1’s modest 2.0% increase. The Bureau of Economic Analysis is scheduled to publish its initial GDP report for the second-quarter in two weeks (July 27).

Uncertainty about rising trade tensions between the US and China (Europe, too) is a risk factor that could trim economic activity going forward. At the moment, prospects for easing this risk aren’t encouraging. US Treasury Secretary Steven Mnuchin this week told Congress that talks with Beijing had “broken down” and the US was essentially waiting for China to offer concessions — a development that some analysts say is unlikely.

Several members of Congress expressed concern about the Trump administration’s plan (or the lack thereof) for trade negotiations. “The administration needs to explain to Congress where this is all headed,” advised Senator Bob Corker, Republican of Tennessee and chairman of the Senate Foreign Relations Committee.  “To my knowledge, not a single person is able to articulate where this is headed, nor what the plans are, nor what the strategy is.”

Federal Reserve Chairman Jerome Powell is also cautious about how the process plays out. Although he’s optimistic about the current state of the economy, “We are hearing a rising level of concern about the effects of changes in trade policy,” he said in an interview on American Public Media’s “Marketplace” program, Bloomberg reported. “I think this process that is going on now is a new one. It’s very difficult to predict how it turns out and we’ll just have to see.”

The ambiguity raises questions about the economic outlook in the second half and beyond, but the official numbers for Q2 look set to deliver upbeat results. Some estimates for the second quarter exceed 4.0%. Now-casting.com’s revised assessment, published earlier today, is a strong 4.2% (green bar in chart below). If correct, the US economy will post the fastest growth rate in nearly four years.

Although some estimates call for a lesser gain, the common theme is an expectation that Q2 output will accelerate, perhaps dramatically. The Wall Street Journal’s new survey of economists for July, for instance, reflects a median forecast of 4.1% growth.

Some analysts, however, worry that the improvement that appears due for Q2 data could mark a top.

“It’s very different being an economy that’s accelerating toward 4 percent and an economy that has a brief surge of 4 percent for one quarter,” Gregory Daco, chief US economist at Oxford Economics, said earlier this week.

True, although it’s still unclear which description applies. Meantime, analysts are watching the flattening yield curve and wondering if it’s close to inverting, which would signal elevated recession risk in the months ahead into 2019. The widely followed 10-year-less-2-year rate spread narrowed to a thin 25 basis points yesterday (July 12), an 11-year low.

Data published to date, however, indicates that recession risk is virtually nil. Last month’s business cycle review, for example, revealed that the probability was close to zero that an NBER-defined recession had started or was imminent. The July 8 edition of The US Business Cycle Risk Report reaffirmed the low-risk reading.

The Q2 GDP report that’s due later this month will probably tell a similar story. The question is whether the acceleration in macro momentum can extend into the rest of the year? Given the trade worries, combined with the Federal Reserve’s rate-hike plans that are squeezing the yield curve, the answer is wide open for debate.


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