Economic growth is expected to have slowed in the second quarter, but more housing-related spending could make up some slack in the consumption categories, says Morningstar's Bob Johnson.
Jason Stipp: I'm Jason Stipp for Morningstar.
We get our first read on second-quarter GDP Friday. Most market-watchers expect a slowdown from first-quarter GDP growth. So are we in a soft patch, or are we in for a long slog here? To offer his insights is Bob Johnson, our director of economic analysis.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: The consensus is expecting 1.2% to 1.4% second-quarter GDP growth. This would be down from 1.9% [in the first quarter]. What are you expecting to see on that second-quarter GDP number on Friday?
Johnson: Well, I'm on the more optimistic side, and I will admit that. I'm at about 1.5% for the second-quarter GDP number, and that's inflation-adjusted. And that is down from the 1.9% that we had earlier. And that is, again, you're taking the first quarter and comparing to the second quarter, and then annualizing it.
Stipp: So, we do expect a slowdown from the first quarter, definitely.
Stipp: What's behind that? Why would we be seeing slowing from Q1?
Johnson: Well, the biggest part of the number is obviously consumption, and the consumer part, and we always talk about that being 70% of the GDP calculation. And then you've got investments in businesses, and you've got investments in houses, and then you've got government, and then finally you've got the import-export data. And the biggest driver of the decline will probably be on the consumption side from data that we've frankly already seen.
Stipp: I know that you track the consumer very closely, and a lot of folks will be looking at that consumption figure. In your opinion, though, is the consumer really slowing down? I think it's undeniable that the consumer has pulled back a bit. Is this slowdown for real? Is it a shift from better spending that we had seen, or is this a soft patch?
Johnson: Well, ... we've got two months of the data already, and I think most people are saying the number that we'll see for June shows no growth in sales and no growth in inflation. And so that's how I get to the conclusion that we're only going to grow consumption about 1.5% in the quarter. That's the consumption part of GDP. That's compared to 2.5% in the first quarter, so that, as you can see, is more than all of the slowdown that I'm expecting this quarter. And some of that is, as we've talked about before, the the generic drug sales, Apple slowing--as everybody waits for the new phone--slowing the electronics category, huge falls in TV prices and saturation issues there. So, there are a number of things that have served up to bring consumption down, and I think that's the main reason that the GDP number is going to look a little weak.
Stipp: So the consumer is looking weak, but do you expect that this weakness is going to extend into the future? You mentioned some of those [factors]; are those temporary things? Are we going to see the consumer pick up here?
Johnson: I think the consumer is going to pick up from here. He has continued to buy autos and he has continued to buy homes. In fact, I mentioned that the consumption is going to be off more than 1 [percentage point]. Yet GDP only will be down 0.4 [of a percentage point] even in my optimistic world. The reason that it's not going to be off more is because there is going to be a higher level of residential spending. I think that might be the one surprise in the report. [The reason I] may be ... a little bit more bullish than most is that the residential spending may add something like 0.6, 0.7, 0.8 [of a percentage point] to the GDP calculation this time around--for a change.
Stipp: So if you think the consumer is going to snap back, then I would expect that you have more optimistic expectations for Q3 and Q4 in GDP. Can you give us a sense of your full-year GDP forecast, and what does that imply for your third and fourth quarter, if we are expecting to see some slowing here in the second quarter?
Johnson: This does differentiate me a little bit, because I’m maintaining my 2% number for the full year. There are some estimates that say, oh, we've seen some slowing in the second quarter and it's down from the first, and so people are beginning to pull out their rulers and going, a-ha, the third and fourth quarter are going to be down, too.
I'm looking at the data and saying, consumer incomes look a little better, inflation seems to be down, and we've had three months where consumers have really saved more than they've spent, and maybe that will break loose a little bit this fall. So, I am thinking that we will have growth accelerate in the third and fourth quarter from the second quarter.
Stipp: What factors are you going to be looking at to track that progress along the way as we start to move into the fall, to know whether we are going to reach that higher, more optimistic GDP for 2012?
Johnson: Well, I am certainly watching primarily the consumption numbers. I really need that consumption number back to at least 2% from the 1.5% that everybody is expecting for this quarter--which, by the way, it is not a bygone conclusion that it is going to be there at 1.5%. Auto sales are kind of weighing on that number, and there is one set of data that says autos are off a lot and one set that says autos are up. So, that's a reason why there is some controversy about the GDP number on Friday.
Stipp: You mentioned that there is some fuzziness there in the data. What other swing factors for Friday's report could make that GDP number higher or lower than the expectations?
Johnson: Well, here is an interesting one on: inventories. A lot of people are looking at the [data] and saying inventory levels are down a little bit, so therefore it is going to be a subtraction from GDP, and it is one of the [reasons] why the people [who are expecting] 1% and sub-1% [second-quarter GDP growth] are there. Others have looked at the data and said, we've got something a bit unusual; we've got actual deflation this quarter. So you are going to have to boost up the inventories because they are now priced at lower levels. So to get it back to real units, you are going to have to boost it up. So inventories might end up actually being an adder to GDP this time, which I think would come as a surprise to some analysts.
Stipp: And what about imports and exports, which have been a swing factor in the past?
Johnson: I am expecting that one is going to be relatively neutral this time. As I look through the numbers, the net between the two is going to take maybe a tenth off of GDP, which has been very, very typical the last three or four quarters. So, I really don't expect that to be much of a factor.
I think it is going to be residential building. I think ... business investment might look a little better than some people think. If the one set of car data proves to be right, the reason it is going to be right is because businesses bought a lot of cars, and that's going to make the business investment category look better. So, one way or another, I'll get some good news out of the auto industry.
Stipp: All right, Bob. I know that you'll be digging into those numbers on Friday, and we'll look forward to your update in your weekly column on Saturday after we see where the number comes in. Thanks for joining me today.
Johnson: Great to be here.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.