Rising North Korea Tensions Threaten US Q3 GDP Outlook

The escalating threats of military action between President Trump and North Korea have put the world on edge, but a new survey of economists projects steady GDP growth for the third quarter. The initial Q3 report is more than two months away and so any estimates at this point are little more than guesses – all the more so in the wake of rising geopolitical risk. For the moment, however, the preliminary projections for economic activity assume that the pickup in growth in Q2 will hold steady if not improve in Q3.

Economists are anticipating a 2.7% increase in GDP in the July-through-September period (seasonally adjusted annual rate), according to average estimate in today’s release of The Wall Street Journal Forecasting Survey. That’s a fractional uptick over the 2.6% advance in Q2.

Recent estimates from other sources, however, reflect a mixed outlook for the government’s official Q3 GDP report that’s scheduled for release on Oct. 27. One of the more optimistic forecasts comes from the Atlanta Fed’s GDPNow model, which is predicting that output will ramp up significantly in Q3 to 3.5% (as of Aug. 9).

On the low end of the projections is an outlook for a softer 2.0% rise in Q3, based on the median forecast among Wall Street economists via CNBC’s Aug. 9 survey.

One factor that’s been weighing on some projections: the political setbacks in Washington on matters related to enacting pro-growth legislation. “Although there is still time for the GOP to deliver comprehensive tax and healthcare reform, the lack of progress to date and inability to pass even partisan reforms suggests that the upside to growth is lower than it was heading into the year,” BBVA Compass Chief Economist Nathaniel Karp wrote in a recent report — before the recent rise in tensions between the US and North Korea.

The war of words between Washington and Pyongyang in recent days may turn out to be a temporary distraction, but even if military action is averted there are other risks to consider. One is the potential for a full-blown economic war with China, which Trump hinted at in yesterday’s comments to reporters:

I think China can do a lot more, yes, China can. And I think China will do a lot more. Look, we have trade with China. We lose hundreds of billions of dollars a year on trade with China. They know how I feel. It’s not going to continue like that. But if China helps us, I feel a lot differently toward trade, a lot differently toward trade.

Some members in Congress, including Democrats, appear to be supportive of ratcheting up economic pressure on China. Sen. Chris Van Hollen, a Democrat from Maryland, has co-sponsored a bill with a Republican senator (Pat Toomey) that would levy new sanctions on countries with economic links to North Korea. Outlining his plans, Senator Van Hollen told CNBC on Thursday:

We say to China, ‘You have a choice whether you do business with North Korea or you do business with the US, but you can’t do both.’ That is what got people’s attention with the Iran sanctions, and that’s what we need to do now.

It’s unclear if there’s broader support in Congress for such actions, but in the current climate it wouldn’t be surprising to see more backing for economic retaliation in the days ahead. Meantime, the prospects for an encouraging Q3 GDP report are hanging in the balance.