GDP Slumps Toward Zero As Key Recent Momentum Ends

The consensus estimate for Q2 GDP is 1.6%, and there are a number of reasons to think that number will go to zero in the current quarter. The Q2 data will be released on July 29.

If July is any indication, there are growing problems with the trade deficit, consumer spending, and business investments. The other critical factor in GDP measurement — government spending — may also hit a multi-year low in the period. There is nothing left of the Obama stimulus package effect, and austerity measures have already done damage at the state and local level.

Consumer confidence has slipped to recession levels, if recent Conference Board and the Reuters-University of Michigan Survey of Consumers are correct. The concerns these surveys show are indicative of worries about jobs, home prices, and the high cost of gasoline. Crude has moved back to $100 and the employment data for June was awful. Recently announced layoffs in both the public and private sectors will make July jobs data just as bad, if not worse.

The U.S. trade balance reached an all-time high last month since October 2008. Exports were strong but the deficit totaled $50.2 billion, largely because of high energy prices. That problem may show a modest improvement in the next month or two, until the impact of crude’s rise returns.

The manufacturing sector has not done much better than its consumer counterpart. Manufacturing activity contracted in the New York region in July for the second straight month, according to the Empire state survey released by the New York Federal Reserve Bank. The Chicago PMI for the last month was better-than-expected, but not good enough to signal a sharp recovery. In the Detroit region, car companies have quietly lowered production as auto sales have slackened.

The demand for U.S. goods and services overseas cannot help but buckle some. The EU regional economies continue to worsen, with the exception of Germany. Japan may need U.S. construction products to repair earthquake damage. That will probably be offset by a sharp drop in demand for U.S. consumer goods.

Economists always point to the U.S. consumer as the key to GDP growth. That may be a fair assessment, but that consumer’s activity is only one problem on a list of economic troubles.

Douglas A. McIntyre