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GDP Is Expected to Fall Again, But 'The Nosedive Is Over'

Thursday, 30 Jul 2009 | 5:23 PM ET

Friday's GDP report is expected to show the economy shrank further in the second quarter, but many economists believe the data will also signal that the recession has finally hit bottom.

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Car Factory Employees

"The nosedive is over," says economist David Jones of DMJ Advisors. "Nevertheless, you come out of this looking past the second quarter with a very uneven recovery picture."

The consensus forecast is that the GDP report will show the economy contracted at a 1.5 percent annual rate in the April-to-June period. That preliminary number will be updated twice in the coming weeks.

Late Thursday, President Obama said he expects Friday's report to show a contraction, but he added that the nation has "stepped away from the precipice."

Obama told reporters he had not seen the GDP report but expects it to reflect that the economic struggle continues. But he said there are reasons to remain upbeat.

"I think this is a number that's going to have a big impact," says Robert Brusca, chief economist of FAO Economics. "Everybody is talking about earnings data. The better the economy gets, the more people start looking at earnings. Right now, the most important thing is the environment. If GDP turns around, that's the best earnings news you can have."

After eye-popping GDP declines of 5.5 percent in the first quarter and 6.3 percent in the fourth quarter of 2009, most economists—and probably even a few policymakers—will settle for a relatively modest decline like that.

"The bottom line is that if it is negative, it is the last negative number we're going to see," says economist Chris Rupkey of Bank of Tokyo-Mitsubishi. "Failing any surprise, it is going to be considered the tail end of the recession."

In recent weeks, the debate has become less a matter of when the recession will end (or, for a small group, ended) and more about the strength and durability of the recovery.

At the end of July, GDP data covering the second quarter may seem somewhat dated, but economists say various key components are likely to offer telltale signs of things to come.

"The details are more important than the headline," says Ram Bhagavatula, managing director at Combinatorics Capital, pointing to such barometers as inventories, consumer and capital spending, fixed residential investment (aka housing) and trade.

"The inventory draw down has been severe," he notes, which typically presages a rebound in production and employment. "If inventories have been drawn done enough one has to be a little bit more optimistic about the third quarter."

"Some of the store shelves seem pretty bare out their," adds Rupkey. "It would indicate that the days of declining production are just about over."

That assumes continued improvement in consumer demand, which appears to have flattened in the second quarter after a notable rebound at the beginning of the year.

"One of the crucial issues going forward is the consumer," says Mickey levy, chief economist at Bank of America. "Not only is it 70 percent of GDP, but with business liquidating inventories at a rapid pace, you can't expect that to reverse until they see that any pick up in demand is sustainable."

A healthy housing sector is essential for that; so is greater job security. Economists point to signs of a possible bottom in housing starts and a modest, upward trend in home sales, even if the data is somewhat clouded by the foreclosure factor.

Housing right now appears to be closely tied to the labor market, and for all the doom and gloom about the job market, more than a few economists think the unemployment rate — now at 9.6 percent — is close to peaking.

"It will edge up, but I think we're close," says Levy.

Brusca points to a decline in corporate layoffs as well as those in weekly and monthly jobless claims since their peak in late March.

"They are a good, reliable indicator of a recession's end," says Brusca, pointing to a pattern dating back to the 1970s.

Both Brusca and Bhagavatula say the July-August period could bring a surprise increase in nonfarm payrolls.

July payroll and unemployment data is due out next week, along with the closely-watched ISM survey of manufacturers, so it won’t be long before the market can let go of the second-quarter GDP data.

Though more than a few economists say the recession probably ended in the second quarter, a lot more are convinced the contraction will be clearly over in the third quarter.

"At this point, I would be expecting to see some positive upside developments with growth," says Rupkey.

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