Moderate rebound in US economic growth in the second quarter with rising inflation

Shipping containers unload from a ship at a container terminal at the Port of Long Beach-Port of Los Angeles, in Los Angeles, California, US, April 7, 2021. REUTERS/LUCY NICHOLSON/File Photo

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  • GDP for the second quarter is expected to rise at a rate of 0.5%
  • Trade has seen a role in the growth revival
  • Inventories are likely to be a hindrance; Consumer spending is viewed moderately

WASHINGTON (Reuters) – U.S. economic growth is likely to recover moderately in the second quarter as companies boosted exports and maintained a solid pace of equipment spending, which could allay financial market fears that the economy is already in a recession.

However, the Commerce Department’s Q2 GDP report on Thursday will still show that the economy is losing momentum due to high inflation that has prompted the Federal Reserve to tighten monetary policy aggressively.

“The economy is still doing well,” said Brian Bethune, professor of economics at Boston College. “It’s not as strong as it was in 2021, but we’re not in a slump.”

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According to a Reuters survey of economists, GDP growth likely rebounded at a 0.5% annual rate in the last quarter. Estimates ranged from a low deflation rate of 2.1% to a high growth rate of 2.0%.

However, the survey was conducted ahead of data on Wednesday showing that the goods trade deficit in June was the smallest in seven months and that shipments of non-defense capital goods excluding aircraft increased strongly.

The reports prompted JPMorgan to raise its second-quarter GDP growth estimate to 1.4% from 0.7%. Goldman Sachs raised its forecast by 0.6 percentage point to 1.0%. Several other Wall Street banks also boosted their estimates. The Atlanta Federal Reserve raised its estimate by four-tenths of a percentage point to a rate that is still negative 1.2%.

A slew of weak housing data combined with weak consumer and business surveys raised expectations for a second consecutive negative quarterly GDP reading. The economy contracted at a pace of 1.6% in the first quarter.

The White House is aggressively defying rhetoric of a recession as it seeks to placate voters before the 3rd of November. 8 midterm elections that will decide whether President Joe Biden’s Democratic Party will retain control of the US Congress.

Treasury Secretary Janet Yellen is scheduled to hold a news conference Thursday to “discuss the state of the US economy.”

Another drop in GDP would meet the standard definition of a recession. But the National Bureau of Economic Research, the official arbiter of recessions in the United States, defines a recession as “a significant decline in economic activity spread throughout the economy, lasting for more than a few months, and usually visible in production, employment, real income, and other indicators.” . Read more

Job growth averaged 456,700 per month in the first half of the year, while industrial production increased at a 6.1% rate in the second quarter. But housing construction has eased.

Not in stagnation

“While the relevant economic indicators appear mixed, we don’t think the National Bureau of Economic Research would feel the need to describe the first half of the year as stagnation even if GDP contracted during the first two quarters of 2022,” said Daniel Silver, an economist. At JPMorgan in New York.

However, slowing growth could encourage the Fed to pull back from large rate increases, although much will depend on the path of inflation, which is well above the US central bank’s 2% target.

The Federal Reserve on Wednesday raised its policy rate by another three-quarters of a percentage point, raising total interest rates since March to 225 basis points. Federal Reserve Chairman Jerome Powell acknowledged the decline in economic activity as a result of monetary policy tightening. Read more

The smaller trade deficit, thanks to record exports, is expected to have added up to 1.5 percentage points to GDP growth in the last quarter. This will end seven consecutive quarters in which trade has been a drag on growth.

As companies continue to rebuild inventory, the pace of what was seen in the fourth quarter of 2021 and the first three months of this year has slowed. Part of that is due to a lack of materials such as semiconductors, hampering automobile production. On the other hand, slowing consumer spending due to inflation has left retailers with excess inventory and little appetite for hoarding more inventory.

Walmart (WMT.N) said this week it needed more price cuts to reduce inventories, which it estimated in May had topped $60 billion at the end of the first quarter.

Inventories are expected to have cut at least 0.7 percentage points from GDP growth in the fourth quarter. Growth in consumer spending, which accounts for more than two-thirds of US economic activity, is believed to have cooled off significantly from the moderate first-quarter rate of 1.8%.

“Consumers have been affected by the rise in gasoline prices,” said Ryan Sweet, chief economist at Moody’s Analytics in West Chester, Pennsylvania. “You will see an increase in consumer spending but it will not be as strong as it has been in the past several quarters.”

While the pace of growth in business equipment spending has likely slowed from the strong rate for the January-March quarter, that should probably be enough to help the economy recover from its first recession since the second quarter of 2020.

The measure of domestic demand – excluding trade, inventories and government spending – will be watched closely to gauge how much momentum the economy is still maintaining.

Final sales to local private buyers account for about 85% of total spending and increased at an average of 3.0% in the first quarter. Residential investment is expected to have diminished due to weakness in home construction as well as home sales, which lowered brokers’ commissions.

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(Reporting by Lucia Moticani) Editing by Andrea Ricci

Our Standards: Thomson Reuters Trust Principles.

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