Expect the Numbers from Q2 to Be Harsh
Brace yourself. Although no one will be surprised by the government’s initial second-quarter economic release that’s due later this week, the numbers are widely expected to be harsh.
Hope springs eternal for Q3 and beyond, but first the crowd has to digest and process the heavy loss that’s in store for Thursday, July 30, when the Bureau of Economic Analysis publishes its “advance” GDP estimate.
The main question: How much blood will spill in Q2? Optimism, such as it is, translates to projecting a loss of -14.3% for output (seasonally adjusted annual rate) via the New York Fed’s latest nowcast (July 24). By the standards of the post-World War II era, that’s a heavy blow—deeper than any recorded quarterly decline in GDP since 1947. The US came close a few times — Q4:2008’s 8.8% tumble and Q1:1958’s 10.5% dive, for example. But a 14.3% crash eclipses those nosedives by a substantial degree – and that’s the optimistic scenario.
Indeed, the median nowcast for a set of estimates compiled by The Capital Spectator points to a 33.0% crash in Q2 GDP — a world below Q1’s relatively mild 5% decline. The Atlanta Fed’s GDPNow model reflects the lowest of the bunch for Q2: a devastating -34.3 decline in economic output (July 27).
The good news is that Thursday’s release is effectively old news and will confirm what’s been widely anticipated for several months. Two months ago, for instance, economists and models were already expecting a shockingly steep decline for this week’s Q2 report. The dark outlook has basically remained unchanged ever since.
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Q2, in short, has long been written off as a lost cause – a statistical poster boy for the coronavirus-induced body blow to the US economy. Several months ago the main focus turned to how the economy fares in Q3 and beyond. Given the unprecedented nature of what’s unfolding, it’s no surprise that the estimates are all over the map.
In the realm of real-time numbers, one of the more upbeat projections arrived in last week’s sentiment-based estimates of GDP for July via IHS Markit’s US Composite PMI. This GDP proxy rebounded sharply in this month’s flash reading, returning a neutral print. The bounce marks the first non-negative result since January. Good news but hardly an all-clear signal.
“While the stabilization of business activity in July is welcome news, the lack of growth is a disappointment,” says Chris Williamson, Chief Business Economist at HIS Markit. “Moreover, a renewed acceleration in the rate of loss of new business raises concerns that demand is faltering. Many companies, notably in consumer-facing areas of the service sector, linked falling sales to re-imposed lockdowns.”
Optimists can point to the Philly Fed’s ADS business cycle index, which continues to reflect a strong recovery in progress, based on data through July 23. But the New York Fed’s version of a high-frequency economic tracker suggests otherwise and so there’s still plenty of room for debate.
The main risk, of course, is the recent revival in Covid-19 cases and deaths. As long as America struggles to manage the virus, the economic outlook will remain challenged at best. An effective and widely distributed vaccine would be a game-changer, but that prospect isn’t on the near-term horizon and there’s debate about whether the medium-term will be any better on this front.
The critical economic indicator to watch is the weekly update on jobless claims, which continues to flash a stark warning. New filings for unemployment benefits continue to rise by one-million-plus a week — claims rose 1.4 million in the week through July 17. This is a huge negative for the labor market and the economy and it appears to endure. Thursday’s claims data (July 30) is once again on track to rise sharply — a 1.388 million increase, based on Econoday.com’s consensus point forecast.
The pressure, not surprisingly, is building and there will be repercussions. Obvious, perhaps, but not yet fully recognized and priced in to markets. But economic reality is hard to ignore forever.
At least there’s no mystery as to the underlying source of the trouble. “The foundations to this recovery are cracking under the weight of a mismanaged health crisis,” warns Gregory Daco, chief U.S. economist at Oxford Economics, a recent research note to clients.