Paul Jackson, Global Head of Asset Allocation Research at Invesco, discusses the importance of today’s US GDP data.
“The first estimate of US GDP for 2021 Q2 is expected to show further acceleration in the economy. However, this may be as good as it gets, with slower growth during the second half of the year.
“GDP growth was 6.4% (annualised) in Q1 and is expected to have been 8.5% in Q2, according to the consensus of economists published by Bloomberg. That is an impressive rate of growth and is expected to be fuelled partly by 10.5% growth in consumer spending (reflecting a release of pent-up demand, itself boosted by government payments to households). That is actually down from the 11.4% seen in Q1 but that is likely to be balanced in the full GDP number by the fact that de-stocking is unlikely to knock 2.7 percentage points off GDP as it did in Q1.
“Among other GDP components, it will be interesting to see if there is an easing of fixed investment spending growth from the 12.1% seen in Q1 (core capital goods orders growth of 18.1% annualised in the three months to June suggests this is unlikely) and whether government spending continues to be as supportive after growing by 5.7% in Q1. Based on recent trade data that shows a widening deficit, it is possible that net exports could again be a weak link in the GDP data (net exports reduced GDP by 1.5 percentage points in both 2020 Q4 and 2021 Q1).
“Finally, this data will reveal the latest quarterly reading of the Federal Reserve’s favourite measure of inflation (core PCE). The consensus view is that the gain will be 6.1%, up from 2.5% in Q1, though the annualised nature of the data tends to exaggerate the swings.
“With the Federal Reserve yesterday suggesting that “The economy has made progress toward these [tapering] goals”, a strong GDP report today would further support the notion that asset purchase tapering could start later this year (probably during Q4, in my opinion). However, recent data would suggest some loss of economic momentum as Q2 progressed, with both retail sales and industrial production settling at lower rates of growth. This suggests that Q2 may be the strongest growth quarter of this year, especially as Covid-19 infections are again on the up, which may require some limits on activity in certain parts of the US. This may convince the Fed to delay tapering for longer than we previously expected.
“Given the heightened expectations for this GDP print, it is hard to imagine upside surprises sufficient to push yields and the dollar much higher (especially given the muted response to yesterday’s announcement from the Fed). I suspect there is more potential for downside surprises, which could push treasury yields lower.”