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By Jason Stipp and Robert Johnson, CFA | 07-17-2013 12:00 PM

Why Second-Quarter GDP Could Be Ugly

Negative second-quarter GDP growth is not out of the question, says Morningstar's Bob Johnson, but the third and fourth quarters should rebound.

Jason Stipp: I'm Jason Stipp for Morningstar.

Recent data suggests that second-quarter GDP could look quite weak, and might even be negative. Here to explain the data and how you should view a bad GDP number is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for being here, Bob.

Bob Johnson: Great to be here.

Stipp: We got some data this week that, for you anyway, suggest we could see a real headwind on second-quarter GDP. This comes also on [top of] some general worries that GDP would be lower in the second quarter than the first quarter. What did we see this week though that suggests even more pressure?

Johnson: Well, there were several things. There was the retail sales report on Monday, and it suggested that retail sales were considerably below expectations. We grew 0.5% instead of the expectation of 0.9%. It was still a relatively healthy number, but it was indeed driven a lot by the auto industry. So that's really helped the number along a little bit. So that was certainly the one piece of data that we got that was a headwind.

Stipp: And that's for June?

Johnson: That's for the month of June.

Stipp: We also got inflation data that added some further worry about that retail sales number.

Johnson: The 0.5% [growth in retail sales] sounded OK, fine--I didn't get my 0.9%, but 0.5% sounds pretty good. Well, it looked a lot less good on Tuesday when we got the CPI report. The CPI showed that inflation grew 0.5% in the month, and so if you put the two numbers together, it means we really didn't have any retail sales growth in the month of June.

Stipp: And housing, which so many folks are holding great hope for, also might not be as big of a help for GDP as we would've anticipated.

Johnson: There were some issues there, too, which really came as quite a surprise. The housing starts and permits came out [Wednesday] morning, and those numbers were really quite a bit weaker than everybody thought. It's going to be hard now to get to our 1 million target for housing starts for the full year, because we were so much below. Now, some of that was volatile apartment buildings, but the single-family [starts are] not racing to offset the difference. It's kind of staying relatively steady-state.

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