US Q2 GDP: First reading under 2% in two years expected - Wells Fargo

On Friday, Q2 GDP data is due. Analysts at Wells Fargo, expect to see the first sub-2% growth rate in two years. According to them, a key swing factor is that private inventories, likely build at a slower pace and pull GDP growth lower. 

Key Quotes: 

“The rate at which businesses add-to or draw-down inventories factors into GDP. It’s a question of current quarter change compared to prior quarter change, making it notoriously difficult to forecast private inventories, especially since inventories are subject to large revisions. On Friday when we get our first look at Q2 GDP, we expect to see that the economy grew at a 1.8% annualized pace and that inventories were a decent size drag on headline growth.”

“Our baseline assumption is that inventories will slow to an $82 billion build in the second quarter, resulting in a 0.9 percentage points drag on GDP growth. A larger slowdown, say just a $74 billion build, could drag GDP down a full percentage point. Conversely, a greater-than-expected build will create a more muted impact and a smaller drag on overall growth.”

“In order for inventories to have no impact on headline GDP, we would need to see a build of $123 billion, yet inventories have not grown by more than $100 billion in consecutive quarters since 2015.”

“The fundamentals signal that private inventories will likely build at a slower pace and pull GDP growth lower in the second quarter. Barring a massive surge of $123 billion or more, the question isn’t if inventories will be a drag, but by how much.”