By Jeffry Bartash, MarketWatch
Sometimes final grades don’t tell us much about true performance. Take the supposedly slowing U.S. economy.
The government’s official report card on economic growth, known as gross domestic product, is likely to show the economy turned wobbly in the spring. Except that it almost certainly didn’t.
Economists polled by MarketWatch predict GDP growth slowed to 2.1% annual pace in the second quarter from 3.1% in the first three months of the year. Ditto for Macroeconomic Advisors, perhaps Wall Street’s premier forecasting firm.
Yet the details of the report, due on Friday July 26, are likely to tell a very different story.
The increase in what consumers spent, for example, could surge above a 4% for the first time in five years. That’s a big deal, since 70% of what goes on in the economy is tied to consumer spending.
By contrast, consumer spending rose less than 1% in the first quarter. Very tepid.
“We expect to see signs of strength in consumer spending — much stronger than the first quarter,” said David Donabedian, chief investment officer of CIBC Private Wealth Management.
What gave a short-lived boost to first-quarter GDP was a surprisingly smaller trade deficit and a spike in inventories that occurred, perversely, because households briefly curbed their spending ways after the holidays. Not a good thing.
The switch will be flipped in the second quarter.
The surge in consumer spending —a huge bright spot — will be offset by a bigger trade deficit and lower inventories.
So the economy is doing great, right? Well, not exactly. The U.S. is growing at a steady pace right now, but storm clouds are a gathering.
The economy’s biggest soft spot is in manufacturing. The ongoing trade fight with China has hurt U.S. exports, forced American firms to scale back production, and spurred them to seek new suppliers.