June’s trade deficit swelled 18.8% to $49.9 billion, the highest since October 2008. That was much worse than Wall Street predicted — or what the Commerce Department estimated in the recent Q2 GDP report. The new report, along with recent inventory data, suggest Commerce will revise down Q2 economic growth from the already-sluggish 2.4% annual rate to about 1%, according to Action Economics. Action Economics is looking for stronger retail inventory figures later this week that would imply a 1.4% GDP pace.
Those downward revisions may bolster Q3 figures. Weaker inventory growth in Q2 suggests there will be less of a drop-off in Q3. Q2’s fat trade gap may mean the same.
But there’s no denying that the recovery is losing steam just as head winds hit. The inventory restocking cycle, which had fueled growth in recent quarters, clearly is ending.
Federal stimulus is waning, with big potential tax hikes looming at year-end if Congress doesn’t act. Meanwhile, state and local governments, though about to get another $26 billion from Uncle Sam for Medicaid and public employees, will be cutting spending and likely raising taxes over the next several quarters. They cut 48,000 jobs in July alone.
Housing activity will be a big negative in Q3 after being a huge positive in Q2. Both reflect the April 30 deadline for the homebuyer tax credit.
Consumer spending — 70% of overall economic activity — grew at a sluggish 1.6% pace in Q2. But even that may be overstanding. Spending picked up through Q1. All consumers had to do was coast in the spring and Q2’s average spending would outpace Q1’s average. That’s basically what happened. Actual nominal spending in June, the end of Q2, actually was slightly below March’s pace. (Inflation-adjusted spending was slightly higher).
Nonresidential fixed investment surged at a 17% annual rate in Q2, thanks to a 21.9% gain in equipment and software. That accounted for 1.5 percentage points of GDP growth. After revisions, business spending seems likely to account for all of last quarter’s growth and more.
With consumers likely to stay cautious and other temporary boosts turning into negatives, the U.S. may rely even more heavily on capital spending going forward.
Not surprisingly, the Federal Reserve and *private economists have been busy cutting their forecasts for the rest of year.
Q2's likely revisions will only add to the public's negative perceptions about the U.S. economy and the trillion-dollar stimulus heading into the midterm elections.
