I’m back from a vacation in northern Vancouver Island. I barely missed hitting a bear on the road. Hitting even a small bear might have been a setback for current quarter modeling (but more so for the bear).
What did I miss? Turns out, not much. The Nowcast forecast for Q2 GDP stands at 9.8%, precisely where it was two weeks ago. The surprisingly strong growth in employment, and close-to-prediction releases for construction and inventories did little to change the overall forecast.
The coming week may supply more information; we will get a slew of releases including CPI, PPI, retail sales, industrial production, housing starts, and export and import prices. None of these will change the overall picture of strong Q2 GDP growth, since they measure growth at the end of the quarter. They will, however, tell us a lot about the continuing trajectory of the economy, and about Q3 GDP growth.
The Nowcast model is designed to project out two quarters, so we already have a prediction for Q3 GDP. So far, it looks pretty good (4.1%) Unfortunately, the time series models for the components are not terribly reliable. The model predicts, for example, a continuing decline in imports, but continued growth in exports for the quarter—in particular, it predicts a big jump in exports in July, the first month of the quarter. This seems unlikely in the current environment. And descriptions of renewed imports sailing to the US after the administration backtracked on some threatened tariffs suggests that a import surge in Q3 might reverse the import decline in Q2, and subtract from growth. The model also predicts continued growth in consumer spending. It’s not an unreasonable prediction: consumer spending has been weak, while employment has remained reasonably strong. Under those conditions, we might expect consumers to pick up their spending again.
Or, we might see businesses finally pull back on employment because of tariff-related uncertainty. That’s certainly possible—even likely—and would vitiate consumers’ recent reluctance to spend. More to the point, it would make consumer spending even weaker.
So we should probably think of the 4.1% prediction for Q2 as an upper bound on possible GDP growth in the coming quarter. We’ll have a much better idea after next week, but my best guess is that GDP growth in Q3 will end up being a lot weaker.
A note on government employment
Federal government employment has certainly been in the news, and there is no question about the direction. Federal government employment has fallen every month since January. It is now down 69,000 from the beginning then. That’s a decline of 2.3%, although the reader should keep in mind that many furloughed employees who are being paid are counted as employed. Still, it’s a surprisingly small decline given the headlines. It underlines the apparent failure of the DOGE initiative and the difficulty in cutting Federal employment without cutting services that are legally required (and that people want).
Meanwhile, state and local government employment is up. The biggest contributor is local education, where employment in June (seasonally adjusted) rose 71,000 from the January level.Education accounts for more than half of all local government employment (makes sense, when you think about local government services). But employment in noneducation local government is also up, and employment at state governments is also up. Are state and local governments hiring up as they fill in as best they can for missing Federal services? The question will bear watching, as important as watching for bears on rural roads in western Canada.
