Markets Await Initial Estimate of Second Quarter GDP

| July 28, 2010

The initial estimate of second quarter GDP will be released on Friday by the US Bureau of Economic Analysis, and with consensus expectations for growth of 2.5%, we believe there is substantial risk of disappointment. Recall that of the reported 2.7% growth in the first quarter, all but 0.9% of it was a result of inventory adjustments. Now that the adjustment process has effectively run its course, we will get our first read on how well the economic recovery is sustaining itself. It is worth noting that the first estimate is just that, an estimate, and it will likely undergo major revisions over the next two months.

Of course, there are other broad measures of economic activity that suggest the US economy has already returned to contraction, including the Consumer Metrics Institute Growth Index (GI), which tracks consumer spending activity on major discretionary purchases in real time. The index is plotted below along with the official GDP number from the BEA.

Notice both the leading nature of the GI and the fact that it is already well into negative territory and heading lower. If subsequent GDP figures continue to track the GI closely, and we fully expect that they will, the US economy will likely return to contraction by the third quarter of 2010. We will see.

Category: Commentary, Market Update

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