Wall Street is on the verge of saying ‘recession’

Dangerous cliff edge
The economy might be on the edge. Wikimedia Commons

Wall Street has almost said it.

In a note to clients Monday morning, Deutsche Bank’s Jim Reid comes within inches of saying the word “recession” to describe the US economy’s fate during the first half of the year.

Here’s Reid:

It’s not infeasible that the US economy will have shrunk in H1 2015. This is perhaps not the most likely scenario but with Q1 likely to be revised down to around -1.0% and with Atlanta Fed GDPNow forecasting +0.7% for Q2 then it’s a distinct possibility. The street is still around 2.5% for Q2 but we probably need some decent hard data soon to justify it.

After the initial reading on GDP showed the US economy grew just 0.2% in the first quarter, subsequent data have led Wall Street economists to take their outlooks for future Q1 revisions well into negative territory. Current estimates from Bloomberg show Wall Street expects the economy contracted 0.8% to start 2015.

The second revision on first quarter GDP is set for release on May 29.

And now with the Atlanta Fed’s GDPNow trackerwhich was spot-on in predicting first quarter GDP — showing such a tepid bounceback in the second quarter, the economy appears to be teetering on the edge of a recession. A recession is defined as two consecutive quarters of negative growth.

Last week after the worse-than-expected retail sales report, we highlighted comments from one bond trader who said the economy appears headed towards recession.

And consumer confidence data released on Friday indicated that Americans are starting to lose faith in an economic rebound in the second quarter.

Wall Street is still looking for GDP to grow around 2.5% in the second quarter, an expectation that appears to be drifting out of touch with recent data.

Here’s the latest discrepancy between Wall Street and the Atlanta Fed, and clearly something will have to give: either the data gets better or Wall Street cuts expectations.

Q2 Atlanta Fed

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