A big positive GDP number isn't so positive
Growth at 12.7% is consistent with slowing demand
The Nowcast forecast for Q2 swung decisively—from -1.0% to 12.7%. That’s right, double digit positive growth in Q2. Could it be?
In truth, the number is almost entirely the result of a huge swing in the trade deficit in the advance numbers released on May 30. The monthly deficit fell to $88 billion in April from $162 billion in March. Imports were down over 20% for the month while exports held up surprisingly well (up 2.9%), much better than the forecast last week. April imports of $276 billion were roughly at the level of December, so there may be more room for imports to fall in coming months! Exports, however, were 11% above the December level; it seems unlikely that they will remain so high in trade war conditions.
The swing isn’t necesarily good news. It confirms that the earlier import surge was the result of importers front running tariffs, and that tariff disruptions are increasinly likely. The model may also miss the runoff of inventories that we should expect as imports decline, and that would offset the positive impact of the decline in imports. Advance wholesale and retail inventories for April showed no change, but that may yet be updated. Or BEA may decide to adjust them down by judgement (just as the statiticians adjusted inventories up in Q1) in the first release.
The model does reflect some news in other sectors. Consumer spending has been weak—real spending in Q1 was revised down from 1.8% to 1.2%, and April consumer spending was just 0.1%. The model still forecasts a robust 3.5% increase in consumer spending, but it may be hopelessly optimstic about a return to trend. Consumer sentiment remains at an extremely low level.
Meanwhile, business investment spending in equipment has preformed better than the model expected. Shipments of nondefense capital goods were up 3.5% in April, and so the forecast for equipment spending swung from -1.8% to 7.3%. A caveat: the big surge was in aircraft. Nondefense capital goods less aircraft shipments fell slighly (-0.1%) in April, and orders fell sharply (-1.3%). Aircraft shipments (and orders) are extremely volatile, so the figure less aircraft is probably a better indicator of the general trend of business investment. But aircraft shipments are still production; they will show up in GDP as investment if purchased by domestic carriers, exports if purchased by foreign carriers, or inventories if left unsold on the tarmac. In any capactity, those shipments will add to GDP.
Comparison to Fed forecasts
The Atlanta forecast was pushed up this week, while the New York Fed and St. Louis Fed forecasts are unchanged. As always, it’s hard to know why the data changed (or didn’t change) in those forecasts. The Atlanta Fed, like the Nowcast, swung up; much less, about 1.4 percentage points, which is still quite a lot for a one month swing. But the message is clear: a large positive GDP number for Q2 looks increasingly likely.
I have been emphasizing for some time that GDP in Q1 and Q2 of 2025 is likely to be misleading. The “weakness” in Q1 was really the result of the import surge (although it looks like consumer spending was a bit low). “Strength” in Q2 may well be a reflection of the tariff wars, rather than the underlying state of domestic consumer and business economic activity. High GDP growth may not, it seems, be something to celebrate.
