Whiff of stagflation may come in Q2 GDP report
By Greg Robb
Published: July 28, 2011 5:06 p.m. ET
GregRobb
Senior economics reporter
WASHINGTON (MarketWatch) — Friday's report on the pace of economic growth may be so weak as to spur talk of stagflation.
Economists polled by MarketWatch expect the economy slowed in the second quarter to a 1.6% annual rate from a already disappointing 1.9% rate in the first three months of the year.
Growth is nowhere near the pace that would make a dent in the 9.2% unemployment rate.
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"It is about half the pace of growth you would like to see at a minimum to make inroads into the multi-million number of jobless workers," said Avery Shenfeld, chief economist with CIBC World Markets.
If the forecast proves accurate it will be the weakest six months since the recovery began two years ago and may fan talk of "stagflation," a period of weak growth and high prices.
That is because inflation is expected to spike in the second quarter. Even the gauge of inflation that excludes oil prices, the so-called core measure of personal consumer price index, rose to approximately a 2.3% rate in the second quarter from 1.6% in the first quarter. This would be the fastest quarterly increase in core prices in two years.
Growth in the second quarter was held down by a well-known series of villains: the Japanese earthquake that hit the supply chain and slowed vehicle production and consumer spending; deadly storms throughout much of the Midwest and Southeast; and crippled state and local governments.
Consumer spending is expected to grow at a 0.8% rate in the second quarter, the slowest pace of the quarter.
Helping keep growth positive will be exports, business investment and defense spending, analysts said.
Many economists are not giving into the gloom because they expect growth to reaccelerate in the second half to above 3% as the temporary factors reverse.
And with the potential negatives so well known by now, Shenfeld said the markets may breathe a sigh of relief if growth is not below 1% level.
"Unless it is a disaster, it will be taken as old news," Shenfeld said.
But early signs of the third quarter have not been encouraging, Shenfeld noted.
Robert Brusca, chief economist at FAO Economics, said it was an open question whether the economy will have enough momentum left to grow once all the temporary factors recede
"If you look at the economy as a sailboat, when headwinds lift unless you get tailwinds you don't move," he said.
Greg Robb
Greg Robb is a senior reporter for MarketWatch in Washington. Follow him on Twitter @grobb2000.