US GDP Outlook: Sluggish in Q2, Followed by Stronger Growth

We will get our first look at the GDP data from the first quarter of 2013 this Friday when the Bureau of Economic Analysis releases its preliminary report. We expect the data to show that the US economy grew at a pretty decent rate in Q1. Consensus expectations call for a growth rate just north of 3%. This is considerably faster than the 0.4% pace of growth that was registered in the fourth quarter of last year, and it is very close to the long-term average for the US economy.

Unfortunately, this pace will not be sustained. The headwinds to growth resulting from the cumulative effects of increased payroll taxes, sharp cutbacks in government spending, and sluggish export growth will restrain economic expansion through the remainder of this year. These headwinds will have their greatest impact in the second quarter of this year. Our forecast calls for GDP growth in Q2 of 2013 to be no better than 1.5%.

But the good news in all of this is twofold: 1) economic growth in Q2 may be slow, but it will still be positive; and 2) the second quarter is already partially over so the pain will not last much longer. So while Q1 will likely be the best quarter this year in terms of growth, Q2 will probably be as bad as it gets. After this current quarter, things will start to improve at an accelerating rate.

To be sure, May and June could be stressful for some sectors of the economy. Many in the manufacturing sector will not be as busy as they would like to be. This will be especially true for those firms who supply the federal government with goods and services. But barring an unforeseen shock, the major economic indicators should be in a well-established trend upward by the end of the summer, and a prolonged period of solid economic expansion should follow.