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Look for an Upside Surprise in the GDP Report

Aaron Task

The final and official second-quarter gross domestic product figures won't be known for several weeks. But the advance report on second-quarter GDP comes out Friday, and the pick here is that the number might come in ahead of the 0.9% consensus (first-quarter GDP was revised to 1.2% from an initial 2%).

"The risks against our estimate have now swung to the upside," Goldman Sachs' economics group commented Wednesday. "A 1% or slightly higher figure would not be at all surprising, whereas a flat or negative one seems quite unlikely."

Goldman, which maintains a 0.5% forecast, suggested Commerce Department officials have "some flexibility" with the data. The big disparity between the April and May trade balance figures, and the fact that second-quarter GDP accompanies the annual revisions to the national income and product accounts, "gives [the Commerce Department] a good deal of leeway," Goldman noted.

With respect to the trade balance, the U.S. trade deficit narrowed to $28.3 billion in May, its lowest level since January 2000 and down 11.4% from a revised $32 billion in April. The shrinking trade deficit bodes well for GDP because it means the export component of the report strengthened. Net exports totaled $19.1 billion in the first quarter, a 0.9% drop.

A stronger-than-expected GDP number would also jibe with the recent uptick in the index of leading economic indicators (LEI), which rose 0.3% in June. That was the third-straight monthly rise in the LEI, which lends some credence to the recovery scenario.

Additionally, Alan Greenspan testified that while the economy is still weak, Fed rate cuts to date are having the desired effect. What better "proof" of this than a decent GDP report Friday?

If the GDP is stronger-than-expected, some will no doubt accuse the government of massaging the data (others say this is standard practice). But from a practical perspective, any sign of life in the economy could trigger a short-term rally in stocks.