US GDP Preview: Banks expecting slowdown in Q2 GDP numbers

Today, we have an all-important release of US Q2 GDP report due to be published at 1230 GMT, which is likely to attract most attention and most economists and researchers are expecting a cooldown in Q2 GDP data after a strong Q1 GDP print.

Danske Bank

“The US BEA will release its advance report on Q2 19 GDP. The Bloomberg consensus median expects a slowdown in annualised growth to 1.8% q/q from the previous 3.1% q/q, while we forecast GDP grew at an annualised rate of 2.3% in Q2 19, led by robust consumer spending and government expenditures. The latter component growth is likely to be derived from a rebound in federal government hours after the negative contribution of the long shutdown in Q1 19.”

TD Securities

“We expect GDP to advance a near-trend 2.0% q/q saar in Q2, down from a strong 3.1% print in Q1. Unlike the prior quarter, we expect consumer spending to be a key engine of growth, rebounding to about 4% after a wobbly start to the year. Business investment, however, continued to slow due to heightened uncertainty while inventories and net exports were likely a drag on growth.”

Bank of New Zealand

“For today's data to come:

• While this was pleasing to see, advanced estimates on trade and inventories suggested that these components will act as a bigger-than-expected drag on Q2 GDP.
• Placing downside risk to the consensus annualized 1.8% estimate - already on track for the weakest quarterly growth in over two years.”

Wells Fargo

Analysts at Wells Fargo, expect to see the first sub-2% growth rate in two years. According to them, a key swing factor is that private inventories, likely build at a slower pace and pull GDP growth lower. 

“The rate at which businesses add-to or draw-down inventories factors into GDP. It’s a question of current quarter change compared to prior quarter change, making it notoriously difficult to forecast private inventories, especially since inventories are subject to large revisions. On Friday when we get our first look at Q2 GDP, we expect to see that the economy grew at a 1.8% annualized pace and that inventories were a decent size drag on headline growth.”

“Our baseline assumption is that inventories will slow to an $82 billion build in the second quarter, resulting in a 0.9 percentage points drag on GDP growth. A larger slowdown, say just a $74 billion build, could drag GDP down a full percentage point. Conversely, a greater-than-expected build will create a more muted impact and a smaller drag on overall growth.”

“In order for inventories to have no impact on headline GDP, we would need to see a build of $123 billion, yet inventories have not grown by more than $100 billion in consecutive quarters since 2015.”

“The fundamentals signal that private inventories will likely build at a slower pace and pull GDP growth lower in the second quarter. Barring a massive surge of $123 billion or more, the question isn’t if inventories will be a drag, but by how much.” 

Royal Bank of Canada

“Normally, the first cut of US GDP would have important policy implications, especially in the week ahead of an FOMC meeting. But with markets now fully anticipating a 25 basis point cut on July 31 (and even pricing in some odds of a 50 basis point reduction) it’s hard to envision an upside surprise on GDP that would have the Fed hold rates steady.”

“In fact, this report should highlight that a rate cut is less about the state of recent economic data and more about providing insurance against trade tensions and slowing global growth (better embodied in sentiment data and activity indicators abroad).”

“Consumer spending was the standout performer in Q2. Last week’s data confirmed US core retail sales grew at an 8% annualized rate in the quarter, the best pace since 2005. This will contribute to household spending rebounding to a 3.8% pace, among the best gains in recent years and sufficient to dispel any concerns about the health of US consumers following a slow start to the year.”

“All told, domestic demand is expected to post a 3.4% gain, the strongest in a year.”

“Headline GDP growth will be less impressive—we expect a 2.2% annualized increase as inventories swing from Q1 add to Q2 drag (i.e. some of the increase in Q2 spending came out of goods produced in earlier quarters and thus doesn’t count toward Q2 output).”

“Net exports, which provided a nice add in the previous quarter, will have subtracted modestly from growth. The end result should be the opposite of Q1 when headline growth was strong but domestic spending soft. Again, this won’t be a report that explains why the Fed looks set to lower interest rates the following week, though it could lead those looking for a 50 basis point cut to reassess.”