U.S. Q2 GDP heading for a similar rise to Q1, with weaker detail
In our quarterly outlook on June 20 we looked for Q2 US GDP to increase by 2.0% annualized before growth of near 1.0% in the second half of the year. Weaker than expected trade and consumer spending data released since then have moved our forecast down to 1.5%, similar to the 1.4% increase seen in Q1.
Our forecast is close to the Atlanta Fed’s nowcast for Q2, which now stands at 1.7%.
Q1’s weaker growth was downplayed due to the slowdown coming mostly from inventories and net exports, with final sales to domestic buyers (GDP less inventories and net exports) rising by a respectable 2.4%. Q2’s detail will be less impressive with final sales to domestic buyers rising by only 1.7%.
We expect a significant negative of 1.2% from net exports, after a wider trade deficit in April was extended in advance goods data for May. We expect exports to fall by 3.6% while imports rise by 5.8%.
Data for April and preliminary data for May however suggest a pick-up in inventory growth, which will offset the negative coming from rising imports. We expect inventories to add 1.0% to Q2 GDP, with the buildup providing downside risk to Q3.
We expect final sales (GDP les inventories) to rise by only 0.5%, the weakest since Q1 2022.
We expect a rise of 1.4% in consumer spending, like GDP similar to Q1’s outcome. Gains of over 3% in consumer spending in the second half of 2023 looked difficult to sustain with real disposable income rising by less than 1%, In Q2 however consumer spending looks set to lag real disposable income.
The consumer spending details are likely to show retail sales near flat in real terms after a negative Q1 but services slowing to 2.0% after two straight quarters above 3%.
Housing investment with a 16.0% increase was an area of strength in Q1 that will be difficult to sustain, with many housing sector indicators losing momentum. Hosing construction is however holding up better and we expect an unchanged outcome in Q2 with downside risks going forward.
We expect a modest slowing in business investment to an 11-quarter low of 1.0% from a 4.4% in Q1, with private non-residential construction and non-defense capital goods shipments both having lost some momentum.
Public construction however is looking a little stronger and we expect government to rise by 4.0% after a weaker 1.8% gain in Q1. Higher defense spending will also provide some support.
Core PCE prices are losing some momentum and we expect a 2.7% annualized increase in Q2, assuming another subdued month in June. This will remain above target but well below the 3.7% bounce seen in Q1 after the second half of 2023 came in consistent with the Fed’s 2.0% target. We expect overall PCE prices to rise at a 2.4% pace.
