U.S. GDP Growth Is Expected To Slow In The Second Quarter

The escalating U.S.-China trade conflict is a wild card with unknown economic consequences. But even before factoring in this risk, the U.S. economy is expected to post slower growth in the second quarter, based on a set of recent nowcasts.

Output in Q2 is on track to decelerate to 2.1% via the median for a set of GDP estimates compiled by The Capital Spectator. If correct, U.S. growth will ease from the strong the 3.2% increase reported for this year’s first quarter.

New York Federal Reserve President John Williams on Monday offered a similar analysis. Speaking in Zurich, he said that “central banks should revisit and reassess their policy frameworks, strategies, and toolkits, to maximize efficacy” in an effort to prepare for a combination of sluggish investment and high savings that are weighing on interest rates. “Absent such changes, central banks will be severely challenged to achieve stable economies and well-anchored inflation expectations.”

In a separate speech yesterday, Boston Fed President Eric Rosengren offered a more upbeat outlook, reasoning that the US economy can weather any turbulence related to the ongoing trade battle between the US and China. In an interview with WBUR radio, he predicted that “the US economy is strong enough that it can withstand the trade issues that are coming up right now.” He added that growth “would likely slow somewhat (if the dispute is not resolved). If you’re growing around 2% to 2.5%, you don’t want to slow a lot from that.”

The possibility of a resolution in the trade conflict, although elusive so far, can’t be ruled out. Reuters today reports a Chinese Foreign Ministry spokesman saying: “My understanding is that China and the United States have agreed to continue pursuing relevant discussions.”

Meantime, the outlook for GDP’s one-year trend also looks set for an extended run of deceleration in the quarters ahead, based on The Capital Spectator’s average estimate via a set of combination forecasts. The point forecast for this year’s annual second-quarter increase is expected to slow fractionally to a 2.6% pace from 3.2% in Q2 and continue to soften in the quarters ahead.

The good news is that a recession remains a low risk for the immediate future, at least for the moment. The question is whether the US-China trade confrontation continues to deteriorate and takes a bigger-than-expected toll on the economy? In that scenario, the outlook for the US macro trend may be darker than it appears.

By contrast, a resolution to the trade impasse could provide a short-term boost to growth.

In other words, it seems that the near-term macro outlook for the US and China is closely bound up in the personal relationship of Donald Trump and China’s President Xi Jinping.

The stakes, however, are unmistakably high. “If we get the full throttle of all tariffs it does risk a recession,” reminds Diane Swonk, chief economist of Grant Thornton.