Q2 Expected To Have 2.25% Annualized GDP Growth

Q2 Optimism Along With Weak Philly Fed

The two Q2 GDP forecasts from the Fed increased slightly even though one of the most important economic reports of the week showed a sequential decline. This was because it was a July report which is outside the second quarter. We’ll go over the changes in the forecasts later. First, let’s look at the decline in the Philly Fed index seen in the chart below. The headline number fell from 27.6 in June to 19.5. The 6-month forecast increased from 31.3 to 36.9. I have been focused on the prices paid segment to see if any inflation is sprouting in line with what the 10-year breakeven rate shows. The Philly Fed’s price index was weak as the price received index was down 11.6 points and the prices paid index was down 4.5 points. The 6-month expectation index saw prices received inch up 1.0 point and prices paid increased 5.7 points. This shows the current situation for inflation is still moribund, but the expectation is for a slight rebound. This report doesn’t help the Fed’s quest to find inflation increases.

As I mentioned, the Fed’s forecasts improved slightly. The Atlanta Fed’s penultimate forecast for Q2 GDP increased one tenth of a percent to 2.5%. The residential construction report caused the estimate for real residential investment growth to rise from -1.6% to -0.6%. The NY Fed’s forecast improved .14% to 2.04%. The chart below shows the Q3 forecast which includes the reporting period for which the Philly Fed’s report took place. Even with the -0.1% impact on the forecast, it increased by 0.11% to 1.95%. The Q3 forecast has been on a big winning streak since the last time I mentioned it a few weeks ago. This is positive news as we might end up having back to back quarters with over 2% annualized growth as I’m expecting 2.25% growth in Q2. While those aren’t historically high numbers, for an environment with a decelerating birth rate, it’s probably higher than the long run growth rate. Besides a temporary boost from tax cuts, sustainable annualized GDP growth of 3% or higher is a relic of the past.