Markets Await Advance Read on Q2 GDP

The week’s big event happens today at 8:30 when the first official estimate for second quarter GDP is released. Most analysts expect the economy to contract for the third straight quarter, and all agree that Q2 is a significant improvement over the prior six months.

The median forecast is for GDP to fall 0.7%, following a 5.5% fall from January to March. The range of estimates is wide, with some forecasting a drop of 2.7% and others expecting growth as high as 0.7%.

Economists at BTMU said the economy “continued to shrink in the second quarter but the advanced data release should show that the pace of decline lessened substantially as the economy finally hit the trough of the business cycle.”

In tune with forecasts, President Obama said on Thursday that GDP will continue to be negative, but that a “significant slowing down of the contraction” would be evident.

The headline will have direct implications for analysts and markets looking ahead to the year, but the details can’t be overlooked. Some of the expected improvement, for instance, is due only to falling imports, said James Marple, economist at TD Securities.

“In the case of government, a rebound in defense spending will be the main contributor to the gain, while on the net-export side the support will likely simply be a matter of imports falling by an even greater amount than exports – hardly something to cheer about,” Marple wrote in a client note.

Moreover, Deutsche Bank’s Joseph LaVorgna said even if recovery is on the way, it will be a slow process. “In addition to the heavy debt burden, households are facing the first significant decline in wage and salary income in over 50 years,” he said. “We will need to see evidence that the labor market decay is subsiding before we become more optimistic toward consumers.”

In addition to results for the last quarter, the Bureau of Economic Analysis will also release significant revisions, for the first time in five years, which could have the potential to make a major impact on investor sentiment.

“The BEA publishes comprehensive revisions every 5 years, adding and deleting concepts, introducing new methodologies, revising data sometimes as far back as 1929, and, in this release, changing the reference year from 2000 to 2005,” explain analysts at IHS Global Insight. “The revisions will likely show that real GDP dropped more in 2008 than current data show, possibly making this recession the deepest since the 1930's.”

The only other data release of the day is the Chicago Business Barometer, an influential index of service and manufacturing conditions, released at 9:45. Analysts use the midwestern index to forecast next week’s nationwide ISM index of manufacturing conditions.

In June the Chicago index jumped up 5 points but conditions remain well below growth (50) mode with a score of 39.9. Analysts expect another 5-point gain in July.

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