Action Economics says the in a descending course adjustment to second-quarter growth may signal accelerated weakness in the third and fourth quarters

by Michael Englund and Rick MacDonald

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As if the worries about a congressional stalemate upon the body the government’s proposed $700 billion financial rescue plan weren’t enough, two economic reports released on Sept. 26 both added to pessimism about whether the U.S. economy have power to skirt a recession. Indeed, downward revisions to second-quarter enormous domestic product and the University of Michigan’s closely watched gauge of consumer sentiment are likely precursors, in the one and the other cases, of worse news to come.

For GDP, notwithstanding what is still a uncommonly impressive 2.8% second-quarter GDP gain, this downwardly revised growth figure is poised to be followed by slower growth in both the third and fourth entertainment. For Michigan sentiment, it is clear that a rebound in gasoline prices, the two hurricanes, and the seemingly without end bad news from the financial markets are capping the confidence rebound earlier in the month and may give an inkling of a renewed weakening in confidence as we enter October.

The downward bump in the final 2.8% U.S. second-quarter GDP gain from the 3.3% preliminary figure was led by a surprising revision lower for service expenditure that took real (inflation-adjusted) growth for this component from 1.3% to 0.7%. This occurred alongside a largely as-expected $4 billion boost to fixed investment, and a downward $5 billion bump to net exports. We also saw a small and unexpected $1 billion downward inventory good order.

The final second-quarter GDP figures still depict a cut to pieces with a big net export contribution, which is now pegged at a massive $81 billion that added 2.8% to second-quarter growth—basically accounting for the entire headline increase—side by side a big $40 billion inventory subtraction that drained 1.6%. Growth in the second quarter was also boosted by a 1.2% real growth rate with respect to decline, with a much larger rebate-fueled 5.5% nuncupatory (unadjusted for inflation) waste clip that was mostly offset by means of price gains, alongside a robust 18.5% pace for nonresidential explanation.

Government expenditure posted a solid 3.9% increase clip, while apparatus and software expenditure contracted at a 5.0% rate. Residential construction continued its downward spiral, though at a diminished rate of 13.3% following quarterly rates of decline of 20% to 27% in each of the prior three quarters.

We at Action Economics will keep our third-quarter GDP growth forecast at 1.7% until the Sept. 29 release of the August personal gains report, notwithstanding that there is downside expose to danger to our estimate from the lower service consumption trajectory in the second-quarter GDP data.

The economy is at present entering the fourth quarter on a particularly frail footing, through notable downside risk from our 0.6% GDP forecast. A negative headline GDP reading in the fourth quarter would almost certainly mean that the National Bureau of Economic Research (NBER) business-cycle dating committee—the body that is the in addition or less official arbiter of U.S. recessions—will back-date a recession to the start of 2008, contempt the notably positive growth rates in the second and, likable, third district as well. The data in the August revenue report, as well as the evolution of events in the markets through the next hardly any pursuit days, might well knock down our fourth quarter GDP estimate sufficiency to reach it added likely than not that all of 2008 direction meet the NBER’s recession criterion.

The Michigan sentiment hand revealed a downward bump to 70.3 in the final September report from the 73.1 figure in the introductory report, modestly narrowing the cranny from the 63.0 August perusal and the cyclical low of 56.4 in June. The to come expectations index was lowered to 67.2 from 70.9, though the outline is still well above the 57.9 August reading and 49.2 June cyclical low. The downward arrangement in the current conditions characteristic to 75.0 from the 76.5 preliminary reading narrowed the smaller gap for this measure from the 71.0 August reading and 67.6 June cyclical low.

The other available monthly confidence measures rose in September, and this is especially constant for the indexes that were released early in the month, ahead of the trifle of negative Wall Street headlines. The September confidence bounce early in the month reflected a big boost from falling mechanical value prices and a surging dollar. Jarring advice headlines and a late-month force price surge is likely capping the gains, and could further empty confidence as we begin October.

We now expect the Conference Board’s consumer boldness report to tell a smaller September bounce than we previously assumed, to 63.0 from 56.9 in August and a cyclical low of 51.0 in June. Early in the month we had expected a bounce to as high as 68, unless we trimmed that estimate to 65 with the sum of two units hurricanes and the gasoline value pop, before the last downward revisal in our forecast on Sept. 29.