On Wednesday, the Bureau of Economic Analysis will release its first estimate of Q2 GDP.
The average economist on Wall Street is looking for 3.0% growth, after the 2.9% drop in Q1. Citi, Barclays, Nomura, Goldman Sachs, and UBS are among the big names forecasting between 2.9% and 3.1% growth.
Deutsche Bank’s Joe LaVorgna is sticking his neck out, predicting the figure will come in at 4.2%.
In a new note, the LaVorgna explains why there’s a good chance that estimate will prove low: it assumes a conservative rate of productivity.
Productivity is defined as GDP over hours worked. Recent data suggests Q2 hours climbed at a 3.8% annualized rate. Assuming a 4.2% GDP rate, we get productivity growth of 0.4%. But major declines in productivity are often followed by a snapback the following quarter. And data show productivity fell 5.8% in Q1. That could yet be revised even lower.
Here’s the chart showing the yo-yo effect:
“Unless Q1 GDP is revised up, Q1 productivity is poised to be revised significantly lower, thereby increasing the probability of a Q2 productivity snapback,” LaVorgna writes. “While hours could be revised lower, this would run counter to the recent trend of upward revisions.”
A 5.8% productivity drop would be the second worst since World War II. After productivity dropped by 11.2% in Q3 1947, it was swiftly followed by an increase of 17.8% in Q4.
For LaVorgna, we can expect a similar rebound Wednesday.
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