How a slowing GDP might be good news for the economy
How a slowing GDP might be good news for the economy
The Bureau of Economic Analysis will release the first estimate of gross domestic product for the second quarter on Thursday.
As a reminder, GDP adds up all the goods and services produced in this country, and bought by anyone — consumers, businesses, foreign customers, the government.
We’re almost a month into the third quarter, so this data for Q2 will be looking backward, economically speaking.
But it still matters, because it’s one of the things the Federal Reserve’s going to be watching closely to figure out if its battling against inflation with higher-for-longer interest rates is also pushing the economy into slow or even no growth.
At the end of last year, economic growth soared, with GDP rising 3.5% to nearly 5%. Then, in the first quarter of this year, growth cooled way down to just 1.4%.
And for the second quarter, “right now the expectations are — which means they take all of the analysts’ estimates — 1.9% GDP,” said Quincy Krosby at LPL Financial.
Stronger growth than the first quarter, but not nearly as strong as 2023. Krosby said the Fed is worried that growth could keep slowing to a crawl or even a stall.
“One point nine, two percent, in that neighborhood, would be comfortable for the Fed and brings us to levels that we saw earlier, pre-COVID,” Krosby said.
That would signal an economy that’s slowing in a manageable way, said Sam Stovall at CFRA Research, without risk of tipping into recession.
“Even though we’ve seen a slight uptick in the unemployment rate, some downticks in the Fed manufacturing surveys, etc., GDP continues to show resilience,” Stovall said.
According to Paul Christopher at the Wells Fargo Investment Institute, the underlying data is a broad-based slowdown from last year’s torrid growth, which he said worried the Fed because it risked sparking inflation.
“Sometimes, bad news is good news,” Christopher said. “And right now, a slowing economy is that bad news that’s really good news.”
Seems like a contradiction, but Christopher explained the Fed’s logic:
“We know the economy has to slow in order to get the Fed to lower interest rates, so that credit can become cheaper and more available to small businesses and households,” Christopher said. “What we need is to see this sequence where the economy and inflation slow, the economy doesn’t go into a recession, and then the Fed cuts rates and the economy can take off again.”
And that’s how you bring a $28 trillion economy in for a soft landing.
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