US Q2 GDP Estimate Slips Further, But Still Set For Strong Gain

Tomorrow’s release of second-quarter US economic data from the government is expected to show output grew at a stronger rate over Q1’s robust gain, based on a set of nowcasts. In line with recent updates, however, today’s estimate reflects another downside revision relative to previous Q2 nowcasts.

US gross domestic product is projected to increase 7.9% (real annual rate) for the April-through-June period, according to the median nowcast for several estimates compiled by CapitalSpectator.com. That’s still comfortably above Q1’s strong 6.4% gain, reported by the Bureau of Economic Analysis.

Today’s update also marks another downside revision relative to the previous estimate. Earlier this month, the median Q2 nowcast was moderately higher at 8.8%.

Despite the downgrade, a 7.9% nowcast still reflects a strong gain for US growth and will probably mark the high point for the current expansion. Note, too, that today’s Q2 estimate points to another solid improvement in quarterly output over the previous period. Although the median nowcast has been revised down in recent months, today’s upbeat outlook at this late date suggests that it’s a reasonably accurate guesstimate for tomorrow’s report (due for release at 8:30 eastern on Thursday, July 29).

A key factor in the recent reduction in Q2 estimates: softer growth in the services sector, which is the main economic input for US economic activity. Manufacturing, by contrast, remains stronger, although this slice of the economy has a substantially softer influence for GDP data.

Last week’s release of July PMI survey data reflects a “softer expansion of business activity” linked to “a slower upturn in new business across the service sector,” reports IHS Markit. “The pace of growth was the least marked for five months, as some firms noted customer hesitancy amid significant hikes in selling prices.”

As a result, the US Composite Output Index (a survey-based GDP proxy) fell to a four-month low in July, although the current print remains close to the strongest reading in the index’s 14-year history.

Looking beyond Q2 data suggests that the main risk factors for the economy are hotter inflation and the spread of the spread of the Delta variant of the coronavirus. Nonetheless, some analysts remain cautiously optimistic for the rest of 2021.

Mark Zandi, chief economist at Moody’s Analytics, is forecasting a “very strong second half of the year.” He expects GDP will increase at a roughly 6% annualized rate, moderately below the median 7.9% nowcast for tomorrow’s Q2 data. Higher inflation that turns out to be more persistent than expected (which could force the Fed to raise interest rates) and the Delta variant could upend Zandi’s optimistic outlook. For now, the risk of serious trouble still appears low, he told The New Yorker earlier this week.

Goldman Sachs, however, is hedging its macro bets by trimming its second-half economic forecast, citing softer consumer spending and higher variant risk. “The services categories where spending remains depressed are generally either associated with high virus risk, such as live entertainment events, or connected to office-based work, such as ground transportation or dry cleaners,” Ronnie Walker, an economist at the investment bank, wrote on Monday.


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