Retail Sales+Trade Deficit=Lower Q2 GDP

The widening of the May trade deficit by $2.0 billion to $42.3 billion yesterday (both in nominal and real terms- the latter being the key to GDP calculations) and the somewhat disappointing retail sales for June this morning, both point to an appreciably lower Q2 GDP than previously expected.

As a result of the May trade deficit number, net exports are now expected to be a bigger drag on Q2 growth than previously thought, probably to the tune of $50 billion, subtracting more than 1 1/2 percentage point from GDP. This would be almost double the 0.83 percent net exports had subtracted from Q1 GDP growth.

In terms of the June retail sales, overall sales fell 0.5%, largely due to a 2.3% decline in vehicle sales. Excluding autos, sales were off by a more modest 0.1%. The part of the retail sales report that is most directly relevant to GDP calculations- that is, total sales less autos/gas station/building materials- was up 0.2% for the month, following a 0.1% decline in May.
These numbers are consistent with personal consumption in the 2 1/4-2 1/2% range in the second quarter, below the first quarter's 3.0% annual rate.

The net-net of these two reports is that Q2 GDP growth now looks more like a 2.5% proposition, with the pace of inventory accumulation remaining the wild card, given the limited inventory data available to date. Such a pace of growth would follow a twice-downward revised 2.7% Q1 GDP, confirming the disappointing failure of the recovery to pick up any momentum in the spring months from an already unimpressive first quarter.

Still, moving forward, a gradual- albeit, frustratingly slow- acceleration in employment growth should help sustain an improvement in income growth and consumption in the second half of the year, that would lead to a rebalancing of the growth trajectory to the 3.0-3.5% range. In fact, the seeds of this likely trend were evident in the May trade deficit data, as well in the ongoing deterioration of the international trade picture in recent months, as imports rose by a healthy 2.9%, reflecting the unfolding strengthening in consumer spending.

Anthony Karydakis