The Bottom Fell Out

Thursday's initial report on real GDP growth in the second quarter is going to break records, and not in a good way.

Right now, it looks like the US economy shrank at a 35% annual rate in Q2. To put that in perspective, the worst quarter we've ever had since the military wind-down immediately following World War II was -10% in the first quarter of 1958, when, not by coincidence, the US was hit by an Asian flu. This is going to shatter that record by multiples and will likely be the worst since the Great Depression.

However, the US economy has already started recovering and we anticipate a strong report for the third quarter. Compared to the bottom in April, retail sales were up 27.0% in June; industrial production has rebounded 6.9%; housing starts, 27.0%.

Now, imagine retail sales, industrial production, and housing starts, are unchanged in July, August, and September; so, basically we're flatlined from where we were in June throughout the third quarter. Even in that scenario, average retail sales in Q3 would be up at a 48.5% annual rate versus the Q2 average; industrial production would be up at a 17.2% rate; housing starts at a 66.5% annual rate. As a result, we're penciling in real GDP growth at a 15% annual rate in Q3, assuming continued reductions in inventories.

This doesn't mean a full recovery anytime soon. Eventually, the economy will pay a price for recent higher government spending and that price may be an eventual return to the Plow Horse growth of 2009-16. The unemployment rate is unlikely to return below 4.0% until at least 2023.