It’s a confusing time for the US economy.
Before the week got under way, Wall Street strategists were starting to wonder if we weren’t heading towards a recession (defined as 2 consecutive quarters of negative growth).
After the first reading on US GDP growth in the first quarter showed the economy expanded just 0.2% to start the year, subsequent revisions have pointed to the US economy actually contracting to start 2015. And the outlook for the second quarter didn’t look much better, with the Atlanta Fed’s GDPNow tracker — which nailed the Q1 GDP number — forecasting second quarter GDP growth of 0.7%.
And then something weird happened: we got a really great piece of economic data.
Housing starts in April rose 20.2% to an annualized pace of 1.135 million, the highest level since November 2007.
Here’s Deutsche Bank’s Jim Reid in a note to clients on Wednesday:
We started the week speculating that it’s possible (although not the most likely scenario) that the US economy may have shrunk in H1 2015. 48 hours later and we’ve seen the San Fran Fed paper on faulty Q1 seasonals gather traction and yesterday we saw blockbuster housing starts and permits so perhaps we’re actually in boom time?
Reid, however, isn’t so sure it’s time to “crack open the champagne” because, well, the Atlanta Fed’s number didn’t change at all after the housing data.
So even if there might be more signs of a bounce back in the second quarter, with Wall Street expecting Q1 GDP to come in at a revised level of -0.8% to -1.2%, the economy still may have shrunk in the first half of the year.
On Wednesday, the main event in markets is the release of the Minutes from the latest Federal Reserve meeting, which Reid says probably will make us feel even more confused about the economy.
Here’s Deutsche Bank’s Joe LaVorgna on what to look for in the Fed Minutes, which will be released at 2 p.m. ET on Wednesday:
The April statement acknowledged the deterioration in Q1 economic activity; recent data have since displayed further weakness. Expect the minutes to highlight the Q1 weakness but underscore policymakers’ view that the most recent soft patch is temporary, due to inclement weather, the West Coast port slowdown and the collapse in energy-related capital spending. They may also mention the potential for seasonal distortion to Q1 output growth, which the San Francisco Fed recently estimated would have been closer to 1.8% upon further seasonal adjustments … Given that the Fed did not have the April employment and retail sales reports, and in light of the recent drop in jobless claims, Fed Chair Yellen’s remarks on the US economic outlook on Friday may give market participants a better sense of how policymakers view the recent trends.
So at least we have that to look forward to.