The government’s preliminary estimate of gross domestic product for the second quarter, scheduled for release on Friday (July 26), is expected to reveal a substantial downshift in US economic growth, based on a set of nowcasts compiled by The Capital Spectator. Although output will be strong enough to skirt a recession through the end of June, the downshift comes at a time of rising concern that the economy’s forward momentum will continue to decelerate in this year’s second half.

GDP is projected to rise 1.9% in Q2, based on the median for several nowcasts (see chart below). If correct, US economic activity will post a substantial slowdown after Q1’s strong 3.1% increase. The good news is that today’s revised nowcast for Q2 reflects a slightly firmer estimate vs. the 1.7% median estimate published earlier this month. That may be an early sign that the recent deceleration in the US macro trend is stabilizing.

Meanwhile, economists are expecting that this week’s GDP report will confirm suspicions that the US economy has hit another soft patch. Note that Econoday.com’s consensus point forecast is also projecting that growth will slide to a 1.9% advance in this Friday’s release.

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Although the broad trend for the economy appears set to ease for Q2, analysts point to ongoing strength in consumer spending as a reason for thinking that the US can sidestep a new recession in the near term. “We expect to see signs of strength in consumer spending — much stronger than the first quarter,” says David Donabedian, chief investment officer of CIBC Private Wealth Management.

Economists at ING last week advised that “households have the cash and the confidence to spend.” Pointing to the July estimate of the University of Michigan consumer confidence index, it’s close to a cyclical high, which is “hinting at a possible acceleration in consumer spending growth in the coming months.”

A firmer pace of consumer spending would help keep the US out of a recession, but for now the broad trend is expected to reflect softer growth. The one-year GDP trend continues to indicate a gradual slide for the near term, based on The Capital Spectator’s average point estimates via a set of combination forecasts. Today’s revised outlook advises that the year-over-year rate of growth will ease in the coming quarters, but remain above the 2% mark. As such, the slowdown doesn’t look set to deteriorate into a recession in the immediate future. If and when the one-year GDP change falls closer to the 1% mark, by contrast, recession risk will be elevated.

As for this week’s data, the expected downshift in this Friday’s GDP report will strengthen the case for cutting interest rates at next week’s policy meeting. “For sure, the Fed is going to dominate for next week. I think we’ll get at least a 25 basis point cut,” predicts Tony Roth, chief investment officer at Wilmington Trust.

The crowd agrees, based on Fed funds futures. A rate cut at the July 31 FOMC meeting is priced at a virtual certainty, with an 81% probability of a quarter-point drop in the Fed funds target rate to a 2.0%-2.25% range, according to CME data. This Friday’s GDP report isn’t expected to change the calculus.

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