GDP Report Could Spur Talk of Stagflation

But while the outlook for inflation remains fairly benign, the outlook for economic growth is also more subdued than perhaps Fed Chief Alan Greenspan has suggested. Despite the Fed's call for more than 5% growth in the second half of the year, the Economic Cycle Research Institute's weekly leading indicator has slowed sharply since the start of the year.

The indicator, which leads GDP growth by two quarters and shows a 73% historical correlation, has moderated in six out of the last seven weeks. In the week ended July 16, it had slowed to a 1.1% growth rate, the weakest pace in 15 months.

To be sure, recent economic data for July has pointed to some improvement in the economy after a slump in June. Consumer confidence has risen to a 2 1/2-year high and chain-store sales seemed to pick up last week. Many economists fully expect consumer spending to improve in the second half of the year after a disappointing performance in the second quarter.

But it's reasonable to expect that GDP will moderate from a very strong pace recently, particularly given persistent high oil prices, a lack of fiscal stimulus and rising interest rates. "We do think we're in a recovery," McManus said. "We just don't think we're in a robust recovery."