Headlines from the US have been dominated by politics over the last few days, with the Republican National Convention coming fast on the heels of the DNC.
However, on the last day of the political stage-making, the market’s attention can abruptly turn back to economic data with the release of the second reading of GDP figures for the last quarter.
Just before the end of July, the advance version was published. This showed the largest drop in the economy since, well, ever. Not surprising since most retail outlets across the country were closed.
However, given the communications and logistics issues due to COVID, the initial estimation is likely off. Therefore, we could see a substantial revision.
Other countries have also had major differences between the preliminary and final measures of their GDP.
What Are We Expecting?
The advanced reading marginally beat expectations. And, since then analysts have revised their projections. The consensus is that the Q2 quarterly GDP change was -32.5% compared to the advance reading of -32.9%.
This suggests that economists expect that the impact of COVID was initially overestimated.
We should remember that at the time, new cases of COVID were growing in the “second wave” that peaked on July 24. A few decimals of difference might have been a major market catalyst in normal times.
However, since COVID, a variation of up to a tenth of the value isn’t likely to change market perception. In other words, we could expect a largely muted response from the market if Q2 GDP comes in at between around -30% to -36%.
Outside of that range, analysts might reevaluate their outlook. And that could drive market sentiment, especially in the fragile optimism we’ve seen over the last couple of days.
The Outlook Beyond
In its most recent assessment, the Fed said they saw the US economy contracting by -6.5% this year.
In order to achieve that, the economy would have to grow at least 15% in the third quarter, assuming a broadly linear recovery. This would be the fastest growth on record, as well.
However, the Fed is expected to revise its projections after its September meeting.
Other projections are a little more optimistic, such as the Congressional Budget Office. This sees a drop of only -5.9% this year.
What to Keep an Eye On
The other factor of note is the hurricane season. The double impact of Hurricanes Marco and Laura is likely to dominate the news.
That said, unless there is a major change, we don’t expect them to have a major impact on GDP projections.
They are, however, both projected to make landfall in the key oil hub for the US. This might constrain supply for a period.
If the hurricanes have enough impact, the stoppage in refining supply could affect prices and inflation.