This morning’s soft auto-industry data has inspired Deutsche Bank to slash its Q2 GDP forecast:The April ISM survey was strong, registering its fourth consecutive 60-plus reading—something which has not occurred since March-June 2004. Moreover, there was no indication in the report of motor vehicle production cutbacks due to parts shortages resulting from the situation in Japan. Indeed, the Chairman of the manufacturing ISM survey, Norbert Ore, admitted as much. However, the April industrial production data suggested otherwise. Manufacturing production declined -0.4% vs. +0.6% previously, largely as the result of a -8.9% decline in motor vehicle and parts production (vs. +3.6% previously). Manufacturing output excluding autos continued to expand (+0.2% vs. +0.4% previously). The pullback in auto output is the result of production impairment due to critical shortages of Japanese-produced parts (i.e. semiconductors, transmissions, paint pigments, etc.). Consequently, the auto production slowdown is going to cause a near-term hit to economic growth.
In order to ascertain the magnitude of the drag, we modelled the motor vehicle output contribution to GDP as a function of the Fed’s motor vehicle production data. As expected, the correlation is a high 75%—shown in the figure below. Based on our estimates of continued—albeit more moderate—declines in auto production in May and June, we could lose up to three-quarters of a percentage point on current quarter real GDP, which we were previously estimating at +3.7%. We are estimating Q2 auto production will decline -8.7% from Q1. However, since the ISM data have been robust thus far and the details of the May NY Empire Survey were also relatively solid, we believe the auto production drag could be partially offset by stronger exports and non-auto manufacturing activity. Hence, we are only marking down our current quarter GDP estimate by 0.5% to 3.2%. Furthermore, there is unlikely to be much of an effect on full year GDP growth, because it appears that Q1 real GDP will be revised up by 0.5% to 2.3% on the back of modestly firmer data on construction, consumption, inventories and net exports (compared to what was initially reported). While further downward revisions to our Q2 2011 forecast are possible, we are hesitant to make any meaningful changes ahead of what we still believe could be a strong May employment report. Our preliminary estimate on May payrolls is +300