Sunday, May 13, 2007

Another Take on Q1 and Q2

Although most economist are optimistic about Q2, a different opinion can be found at Nouriel Roubini website.

Based on a variety of data that have come out after the first estimate of Q1 US growth at 1.3% it is now likely that US growth in Q1 was actually below 1% (probably close to 0.7%); we are thus already into a “growth recession” territory. As discussed extensively in this blog a US hard landing can take two forms: a “growth recession” i.e. a period of time when growth is well below potential and in the 0% to 1% range; or an outright recession, i.e. two consecutive quarters of zero growth.

. . . The revisions of Q1 GDP growth that will push the revised estimate of Q1 growth rate below 1% are:

- Lower change in inventories than initially estimated reducing Q1 growth
- Better construction spending than initially estimated increasing Q1 growth
- Much worse trade balance in March than initially estimated reducing Q1 growth

The net effect of these three factors is an estimated 0.7% growth for Q1 (JP Morgan today revised its Q1 estimate downward to 0.8%).

Much more seriously, Q2 started on a very weak note for private consumption based on
initial estimates of retail sales. I now expect Q2 growth to be closer to 0% or even negative (i.e an outright recession).

Please note that Dr. Roubini has been predicting a recession for some time. His initial estimates were that it would start in Q1 2007. His estimates are constantly stymied by the persistent consumer and their ability to spend.

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