Vital Signs: Economic Growth Forecasts Rise

Economists are putting the final touches on their expectations for second-quarter growth in real gross domestic product, due later this month, and this week’s reports will help to shape those projections. On balance, the numbers are looking a lot higher than they were at the beginning of the quarter, but the range of projections is unusually wide so close to the actual report. For now, GDP estimates generally run from -1% at UBS to +2% at JPMorgan. However, the surprisingly upbeat May numbers on consumer spending, capital goods shipments, and other recent reports suggest growth toward the high end of that range.

In particular, real consumer spending, which takes inflation into account, rose 0.4% in May, with obvious help from the tax rebates, and outlays in previous months were revised up. Even if June spending fails to increase, which is highly unlikely given the continued boost from rebate checks, real consumer spending would still grow at an annual rate of 2.2% for the quarter. Despite plunging consumer sentiment, which will get a July update on Friday, that would be twice as fast as the first quarter's 1.1% rise and a significant boost to second-quarter GDP growth.

Another big component of the expectations for last quarter’s growth will be Friday’s report on May foreign trade. Trade has been a major factor keeping the economy afloat. Over the past four quarters, the average quarterly contribution to growth in real GDP from the narrowing in the trade deficit has been 1.1 percentage points. The further shrinkage in the April trade gap, after adjusting for inflation, suggests another significant contribution in the second quarter, but the May trade data will help to firm up that expectation.

Capital spending has also held up surprisingly well through May. Shipments of nondefense capital goods, excluding aircraft, posted strong gains in March, April, and May. The growth of both shipments and orders has accelerated sharply from their paces in the first quarter. Plus, outlays for business construction continued to rise in May, although less so than in recent months. These reports suggest capital spending was not the big drag on second-quarter growth that many economists had feared.

The biggest drag, of course, will still be housing. Residential construction continued to fall through May, but the downdraft may have diminished a bit last quarter, compared to the 1.2 percentage points it subtracted from first-quarter GDP growth. Recent numbers on existing home sales have been encouraging, suggesting the two-year dropoff in demand is bottoming out. This week’s numbers on pending sales of existed homes will offer further evidence on that trend.

Finally, for this week, Wall Street will be especially interested in Thursday’s Congressional testimony by Fed Chairman Bernanke and Treasury Secretary Paulson. Bernanke and Paulson will be testifying on proposed regulatory changes for financial institutions before the House Financial Services Committee. Those changes are certain to have long-ranging effects on investment banking firms.

Here’s the weekly economic calendar, from Action Economics.

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