By Mike Bryan, Patrick Higgins, and Brent Meyer
On Thursday, we got a revised look at the economy's growth rate in the second quarter. While the 2.5 percent annualized rate was a significant upward revision from the preliminary estimate, it comes off a mere 1.1 percent growth rate in the first quarter. That combines for a subpar first-half growth rate of 1.8 percent. OK, it's growth, but not as strong as one would expect for a U.S. expansion and clearly a disappointment to the many forecasters who had once (again) expected this to be the year the U.S. economy shakes itself out of the doldrums.
Now, we're not blind optimists when it comes to the record of economic forecasts. We know well that the evidence says you shouldn't get overly confident in your favorite economists' prediction. Most visions of the economy's future have proven to be blurry at best. Still, we at the Atlanta Fed want to know how to best interpret this upward revision to the second-quarter growth estimate and how it affects our president's baseline forecast "for a pickup in real GDP growth over the balance of 2013, with a further step-up in economic activity as we move into 2014."
What we can say about the report is that the revised second-quarter growth estimate is a decided improvement from the first quarter and a modest bump up from the recent four-quarter growth trend (1.6 percent). And there are some positive indicators within the GDP components. For example, real exports posted a strong turnaround last quarter, presumably benefiting from Europe emerging from its recession. And the negative influence of government spending cuts, while still evident in the data, was much smaller than during the previous two quarters. Oh, and business investment spending improved between the first and second quarters.
All good, but these data simply give us a better fix on where we were in the second quarter, not necessarily a good signal of where we are headed. To that we turn to our "nowcast" estimate for the third quarter based on the incoming monthly data (the evolution of which is shown in the table below). A "nowcasting" exercise generates quarterly GDP estimates in real time. The technical details of this exercise are described here, but the idea is fairly simple. We use incoming data on 100-plus economic series to forecast 12 components of GDP for the current quarter. We then aggregate those forecasts of GDP components to get a current-quarter estimate of overall GDP growth.
We caution that unlike others, our nowcast involves no interpretation whatsoever of these data. In what is purely a statistical exercise, we let the data do all the speaking for themselves. Given the first data point of July -- the July jobs report -- the nowcast for the third quarter was pretty bleak (1.1 percent). Things improved a few days later with the release of strong international trade data for June, and stepped up further with the June wholesale trade report. But the remainder of the recent data point to a third-quarter growth rate that is very close to the lackluster performance of the first half.
In his speech a few weeks ago, President Dennis Lockhart indicated what he was looking for as drivers for stronger growth in the second half of this year.
- "I expect consumer activity to strengthen."
Today's read on real personal consumption expenditures (PCE) probably isn't bolstering confidence in that view. Real PCE was virtually flat in July, undermining private forecasters' expectation of a moderate gain. Our nowcast for real GDP slipped down 0.5 percentage points to 1.4 percent on the basis of this data, and pegged consumer spending at 1.7 percent for Q3 -- in line with Q2's 1.8 percent gain.
- "I expect business investment to accelerate somewhat."
The July data were pretty disappointing on this score. The durable-goods numbers released a few days ago were quite weak, causing our nowcast, and those of the others we follow, to revise down the third-quarter growth estimate.
- "I expect the rebound we have seen in the housing sector to continue."
Check. Our nowcast wasn't affected much by the housing starts data, but the existing sales numbers produced a positive boost to the estimate. Our nowcast's estimate of residential investment growth in the third quarter is well under what we saw in the second quarter. But at 5.3 percent, the rebound looks to be continuing.
- "I expect the recent improvement in exports to last."
Unfortunately, the July trade numbers don't get reported until next week. So we're going to mark this one as missing in action. But as we said earlier, that June trade number was strong enough to cause our third-quarter nowcast to be revised up a bit.
- "And I expect to see an easing of the public-sector spending drag at the federal, state, and local levels."
Again, check. The July Treasury data indicated growth in government spending overall. So the July data are a mixed bag: some positives, some disappointments, and some missing-in-actions. But if President Lockhart were to ask us (and something tells us he just might), we're likely to say that on the basis of the July indicators, the "pickup in real GDP growth over the balance of 2013" isn't yet very evident in the data.
This news isn't likely to come as a big surprise to him. Again, here's what he said publicly two weeks ago:
When I weigh the balance of risks around the medium-term outlook I laid out, I have some concerns about the potential for ambiguous or disappointing data. I also think that it is important to be realistic about the degree to which we are likely to have clarity in the near term about the direction of the economy. Both the quantity of information and the strength of the signal conveyed by the data will likely be limited. As of September, the FOMC will have in hand one more employment report, two reports on inflation, a revision to the second-quarter GDP data, and preliminary incoming signals about growth in the third quarter. I don't expect to have enough data to be sure of my outlook.
It's still a little early to say with any confidence we won't eventually see a pickup this quarter, and we can hope that the incoming August numbers show a more marked improvement. All we can say at this point is that after seeing most of the July data, it still feels like we're stuck on the tarmac.