Concerns about the US economy persist, but if there’s a slowdown brewing it’s unlikely to show up in the second-quarter GDP report. Revised nowcasts for the government’s Q2 report (due on July 30) continue to indicate a robust recovery following Q1’s slight contraction.
The median nowcast for GDP in the April-through-June quarter points to a 2.4% increase in output, based on a set of estimates compiled by Capital Spectator. That’s a tick below the 2.4% rise in the previous update (June 6). The persistence of 2%-plus growth at this late date in the quarter is encouraging and suggests downside revision risk is fading. Short of a dramatic collapse in June activity, a recovery of some degree looks likely for Q2.
The bigger concern is that the second half of the year will be more challenging as the effects of tariffs and other factors accumulate. Yesterday’s retail sales report for May could be a warning of things to come. Spending fell 0.9%, the biggest monthly decline in four months.
“Tariff announcements have had a clear impact on the timing of large-ticket purchases, notably autos, but there are few signs yet that tariffs are leading to a general pullback in consumer spending,” said Michael Pearce, deputy chief economist at Oxford Economics. “We expect a more marked slowdown to take hold in the second half of the year, as tariffs begin to weigh on real disposable incomes.”
Geopolitical risk is also lurking as the Israel-Iran conflict continues, with rising concern that the US may become involved. The US military is reportedly preparing to potentially join Israel’s attack on Iran. “I’ve been negotiating. I told [Iran] to do the deal [regarding nuclear facilities],” Trump said on Tuesday. “They should have done the deal. The cities have been blown to pieces, lost a lot of people. They should have done the deal. I told them do the deal, so I don’t know. I’m not too much in the mood to negotiate.”
The conflict may keep oil prices elevated, which in turn will lift headline inflation. In that scenario, the Federal Reserve may feel pressured to keep interest rates steady for an extended period, or even raise them, depending on how long the fighting lasts and how it influences energy costs.