The U.S. will be releasing the advanced estimate for its Q2 GDP growth this Friday (12:30 pm GMT). So if you’re looking for a possible source of post-FOMC Greenback action, then this top-tier report may just be it.
Oh, for the newbies out there, the U.S. Bureau of Economic Analysis (BEA) compiles and releases the official U.S. GDP reports. And they come in three flavors: (1) the first or advanced estimate, (2) the second or preliminary estimate, and (3) the third and final estimate.
The advanced estimate is the least accurate and is often revised as new data come to light, but it does give both forex traders and decision makers alike the first ever glimpse on how the U.S. economy fared, so it usually triggers a reaction upon release.
Getting back on topic…
How did the Greenback react to Q1 2017’s advanced estimate?
The advanced estimate for Q1 2017’s GDP growth way released on April 28. And unfortunately, it came in at 0.7% quarter-on-quarter annualized, which is below the consensus range of 1.0% to 1.3%.
Moreover, the rate of expansion in Q1 2017 was a drastic slowdown from Q4 2016’s +2.1% and marked the second consecutive quarter of slower growth, as well as the slowest growth in three years to boot.
The slower growth was due to a drastic slowdown on consumer spending (+0.3% vs. +3.5% in Q4) and weaker growth in private investment (+4.3% vs. +9.4% in Q4). The weakness from the aforementioned GDP components were partially offset by the 5.8% rebound in exports (-4.5% previous) and weaker imports (+4.1% vs. +9.0% in Q4).
Instead of dropping like a rock, however, the Greenback reacted by climbing higher instead.
This may seem like a weird reaction, but as noted in my Preview for Q1 2017 U.S. GDP, the available GDP components were pointing to a further slowdown. Retail sales in Q1 2017, in particular, were much weaker compared to Q4 2016.
Moreover, Fed Chair Yellen was grilled about the weak projections for Q1 2017 GDP growth during the March FOMC statement, with focus particularly being directed at the Atlanta Fed’s forecast of 0.9% quarter-on-quarter annualized.
Also, growth in Q1 has a historical tendency to be slower compared to Q4 of the previous year. Furthermore, there were plenty of news reports about the possibility of a slowdown in Q1 GDP growth.
In other words, the market was very likely anticipating a slowdown in GDP growth already. As such, a “buy the rumor, sell the news,” or to be more precise, a “sell the expected slowdown and buy the actual data” very likely played out since the Greenback was broadly lower ahead of the GDP report and then climbed higher when the GDP report turned out be a disappointment (as expected).
There was little follow-through buying or selling, though, likely because there were jitters over a possible U.S. government shutdown at the time, but that obviously got resolved.
How did the final estimate for Q1 turn out?
The reading for Q1 2017 GDP growth was upgraded to +1.2% quarter-on-quarter annualized during the preliminary estimate and then upgraded again to +1.4% in the third and final estimate.
The upgrades primarily reflected upward revisions to consumer spending (+1.1% final vs. +0.6% preliminary, +0.3% advanced) and to exports (+7.0% vs. +5.8% previous and advanced).
These were partly offset by a downward revision to private fixed investment (+3.7% vs. +4.8% preliminary, +4.3% advanced).
Despite the upgrades, Q1 GDP still marked the second quarter of weaker quarterly growth, as well as the weakest quarterly growth in three quarters.
Even so, GDP growth is not so bad in terms of trend since Q1 GDP grew by 2.1% on a year-on-year basis, so the U.S. economy is still on track to hitting the Fed’s 2.2% forecast for 2017.
What’s expected for Q2 2017’s advanced GDP estimate?
The general consensus among economists is that the U.S. economy grew by 2.5% quarter-on-quarter annualized in Q2. As such, market analysts are expecting that GDP growth accelerated in Q2 compared to Q1’s final estimate of 1.4%.
Looking at some of the available GDP components, retail sales for all of Q2 is 0.24% more compared to Q1, so consumer spending was likely stronger in Q2.
Trade is a bit tricky since we’re missing the trade data for June. Given the available data, however, trade will probably a drag or at least weaker in Q2 compared to Q1.
Private investment is also painting a mixed picture but will probably be a drag since economic reports related to fixed private investment were generally weaker compared in Q2 compared to Q1. In particular, building permits issued and housing starts in Q2 were less overall compared to Q1.
There is a good chance that inventories will boost the private investment component of GDP, though, since the U.S. Census Bureau reported a rebound in business inventories in May. In contrast, business inventories were actually a drag to the private investment component of GDP in Q1.
Moving on to publicly available GDP forecasts from other institutions, the Atlanta Fed’s GDPNow is forecasting that Q2 GDP grew by 2.5% as of July 19. This is in-line with the general consensus. More importantly, the Atlanta Fed’s GDPNow tends to present the most pessimistic forecast, so the fact that it’s forecasting a faster growth in Q2 is rather noteworthy.
The New York Fed’s Nowcast, meanwhile, is less optimistic since it’s forecasting a +2.04% rate of expansion as of July 21.
As for Moody’s Analytics, it’s forecasting a 2.6% rate of growth as of July 24, which is a tick faster compared to the consensus of +2.5%.
Regarding historical tendencies, how economists fare with their guesstimates is pretty much a coin toss.
However, there is a very interesting historical pattern in that the advanced reading for Q2 is almost always better compared to the final reading for Q1. Heck this historical tendency holds true all the way to friggin’ 1947!
Overall, the available economic reports are painting a mixed picture on GDP growth. But since consumer spending, which is the backbone of the U.S. economy, was likely stronger in Q2, chances are good that Q2 GDP growth will print a stronger reading compared to Q1.
Also, even the Atlanta Fed Fed’s GDPNow, which usually has the most pessimistic forecast, is expecting a faster 2.5% growth in Q2.
Moreover, there is a very strong historical tendency for Q2 growth to be stronger compared to Q1.
As such, Q2 growth will very likely print a rebound. As to whether we’ll get an upside or downside surprise, that’s more of a coin toss since there’s no clear historical tendency and the available economic reports are actually somewhat mixed, as noted earlier.
Anyhow, just remember that an upside surprise usually ramps up demand for the Greenback, at least in the short-term. A downside surprise, meanwhile, usually results in the Greenback getting dumped.
However, be wary of preemptive buying ahead of the GDP report since those traders that entered preemptively will likely unwind their positions when the actual report comes out, unless the reading is significantly better-than-expected.