The Real Story of GDP Growth

by: Sy Harding

The much anticipated 2nd quarter GDP report showed the economy grew 2.4% in Q2, missing the consensus forecast of 2.5% by only a fraction. And GDP for the first quarter was revised up from the previously reported 2.7% to 3.7%.

So it was a mixed report that could be viewed as not that bad.

However, we need to look at the trend of the first half of this year to see the real story.

A few months ago the forecasts were for the economy to grow 4% in the 2nd quarter, which would have been an improvement over the 1st quarter. A month or so ago, as indications became clear that the economy was slowing sooner and faster than had been expected, the consensus forecast was revised down to 3% growth. And in the last week or two, as economic reports worsened further, the consensus forecast was revised down again, to just 2.5% growth. And the actual growth even missed that sharply lowered forecast.

So, the trend of the steady downward revisions of the Q2 forecasts; 4%, 3%, 2.5%, and then the report at 2.4%, confirms that the economy is slowing even faster than economists are able to revise their expectations downward.

The actual quarterly reports also show the trend, 5.6% growth in the December quarter, a now revised 3.7% in the March quarter, and now 2.4% in the June quarter.

And all along, the forecasts, not only from economists but from the Fed, have been that the economy will slow in the second half of the year.

That the 2nd quarter did not show an improvement over the 1st quarter, as originally expected, and forecasts had to be lowered so significantly during the 2nd quarter, and still the growth came in lower, does not bode well for the extent of the expected second half slowdown.

Wall Street will be pushing the idea that Q2 growth only missed the consensus forecast by a fraction. But we believe the downward trend of the actual reports so far this year, and even more importantly how the Q2 forecasts had to be revised lower so rapidly as the quarter progressed, is the real story.

Disclosure: No positions