US Economists See Significant Downward Revision Of US 2Q GDP Ahead

Thursday, August 11, 2010
By Greg Robb


Growth in the U.S. economy from April through June was probably much softer than first estimated by the government, private economists said Wednesday after updated trade figures for June were published showing higher imports.

"The markets might face their biggest downside economic surprise of this recent growth slowdown yet in the form of a downward second quarter gross domestic product revision, which today's U.S. trade deficit figures suggest will be a whopper," wrote analysts at Action Economics.

Instead of growing at a 2.4% annualized pace in the second quarter, real gross domestic product will likely be cut almost in half to a 1.3% annual rate, according to economists surveyed by MarketWatch.

Worries about the health of the U.S. economy, as well as in China and other regions, drove a downturn in world stock markets Wednesday.

The government's first estimate of quarterly GDP growth for a quarter includes assumptions for the third month for inventories and trade.

Government economists had expected the deficit to widen, but the June data surprised everyone.

The report was "spectacularly terrible," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The June trade deficit rose to $49.9 billion from $42 billion, well above the consensus of $42.5 billion.

Government analysts defended their assumptions, as real GDP figures over time have had an average revision of a half percentage point.

"We try to make the best assumptions; we are not always right," said Brent Moulton, associate director for national economic accounts at the Bureau of Economic Analysis.

Moulton said the government economists do not have access to any information that is unavailable to private economists.

The government assumed that imports would spike higher in June. But they missed on their assumption that the imported goods would flow into higher inventories.

The Commerce Department is scheduled to release revised second-quarter GDP estimates on Aug. 27.

Michael Feroli, economist at JPMorgan Chase, said the GDP was disturbingly low but should not be overstated.

"While this is a disturbingly low number, it should be pointed out that very little of the incoming data imply downward revisions to domestic final sales."

Domestic final sales, a proxy of demand because it excludes inventory behavior, rose 1.3% in the second quarter, just a shade higher than the average 1% gain since the recovery started last year.

The trade and inventory data have economists scratching their heads. Stronger imports typically mean stronger demand.

"A broad-based increase in the demand for foreign products doesn't sound like an economy that is faltering to me," wrote Joel Naroff, president of Naroff Economic Advisers.

Feroli described the surge in imports as "missing socks"--they don't appear in any data. Retail sales and inventories were weak in the second quarter.

"It is not obvious where all these goods are going," Feroli said.

Economists are torn about what this means for the second half of the year.

Forecasters are looking for growth of about 2.5% in the final two quarters of the year, according to the MarketWatch survey.

Some analysts believe that the higher import numbers will be a drag on third-quarter growth. Others think that imports will take a breather, boosting growth a bit in the second half.

Analysts at Macroeconomic Advisers, who send out running tabulations of current-quarter GDP growth, said they trimmed their third-quarter GDP estimate to a 2.4% rate from the previous forecast of 3%.

Lost in the fury over faster imports is the poor performance of U.S. exports in June, which is "bad news: clear as the ring in a bell," said Robert Brusca, chief economist at FAO Economics.

Exports were down 1.3% in June and earlier strong gains have stagnated in the past four months.

Germany, Japan and China are all exporting much more than they are importing, Brusca noted.

"Our exports
.. are headed for an ever-shrinking target it seems: foreign growth," he said.

Economists said that could push Congress to enact last-minute protectionist measures ahead of the November midterm elections.

-Greg Robb; 415-439-6400; AskNewswires@dowjones.com