Better Signs

A few key economic reports have taken a turn for the better, boosting expected real GDP growth in the second quarter and pointing to an upward revision to first quarter growth.

Retail sales grew 0.5% in May, very close to consensus expectations, and were revised up substantially for prior months. Pairing this data with other recent reports, it now looks like real GDP in Q1 will be revised up to a 3.3% annualized growth rate from the prior estimate of 3.1%.

More important than the Q1 revisions, it now looks like real GDP is growing at a 2.0% annual rate in the second quarter. That may not sound great, but it's a big improvement from the 0.9% estimate the Atlanta Fed's "GDP Now" model was signaling in early May. Moreover, this comes despite Q2 growth likely being held down by inventories. Both our estimate and the Atlanta Fed's estimate of real GDP growth excluding inventories (also known as Final Sales growth) is running 3.0%+ in Q2. Fed, take note. With Final Sales this strong, the underlying economy is doing well.

Moreover, with inventories likely to rebound in months ahead, we expect total real GDP growth will come in near 3.0% in 2019 (Q4/Q4), well above the Fed's consensus projection in March of 2.1%. In other words, Fed forecasts have been overly pessimistic and will likely affect rate cut thinking.

Despite what the data show, some analysts continue to price in recession, and the bond market seemingly agrees. The tepid May 75,000 increase in US payrolls bolstered pessimism, but other employment data don't support this fear. The highest frequency data on jobs are unemployment claims, and those don't signal a problem at all. Initials claims came in at 222,000 last week, while the four-week moving average was 217,000, both very low levels. Moreover, the US currently has 1.6 million more job openings than unemployed people.

It's true that consumer and producer prices increased only 0.1% in May, but in the past three months consumer prices are up at a 3.3% annual rate while producer prices are up at a 3.5% pace.