A "4" Handle on Q218 Real GDP Growth?

While fears of trade/currency wars hover in the background, strong fundamentals should continue to underpin stocks this week.   Corporate earnings have been exceeding estimates, with the S&P 500 companies reporting to date up about 27% y/y (versus the aggregate estimate of 20%).   And, consensus looks for 4.1% (q/q, saar) for Q218 Real GDP Growth (due Friday) -- the most important US economic data in the week.  Even if Real GDP comes in below 4.0%, which I do not rule out, growth would be well above trend.  Trade/currency wars could dominate the  stock market in the seasonally weak August.

My concern about a "4" handle on Q218 Real GDP is that the Atlanta Fed model's 4.5% projection is based in part on an estimate of Consumer Spending that risks being too high.  The model estimates 3.2% for Q218 Real Consumer Spending, well above the 2.3% q/q annualized growth seen in May.   To get to the Atlanta Fed's estimate requires either a surge in June spending (not suggested by the retail sales or motor vehicle sales data) or a large upward revision to April-May.  Even a large rebound in spending on natural gas and electricity, after they dropped in May, would not likely be enough to attain the model estimate.  The risk is that slower-than-estimated consumption would subtract at least 0.5% pt from the model's GDP projection.

A sub-4.0% Q218 Real GDP print would likely elicit a negative response by stocks and a positive one by Treasuries, particularly if they moved in anticipation of 4.0% ahead of Friday's release.  But, this knee-jerk reaction should be short-lived.  Growth  and corporate profits still would be strong. And, the Fed should stick with its gradual approach to tightening.

A print above 4.0% also has to be dissected carefully.  The well-publicized jump in soybean exports could be a one-off boost to exports, for example.  If it is responsible for the 4+% print, the markets could give back some of their moves on the GDP headline -- as these exports should subtract from GDP in Q318.  In contrast, if spending on natural gas and electricity did not rebound sharply in June, it will in July.  The June data won't be released until Tuesday, July 31.

But, regardless of how Q218 Real GDP prints, economic growth looks like it will stay strong in Q318.   Initial Claims ratcheted down in early July, a good sign.   But, seasonal adjustment of Claims in early July is difficult, so not much should be made of their strength at this point -- particularly since it is not yet confirmed by Continuing Claims.  It is too early to have a reliable estimate of Q318 Real GDP.