This column originally appeared on Real Money Pro at 7:53 a.m. EDT on Sept. 4.NEW YORK ( Real Money) -- As I look toward the balance of the year, uncertainty seems to be the operative word. Second-quarter reported EPS mostly met expectations, while top-line growth began to disappoint. Forward guidance, however, was conservative. I expect more pressure on corporate profits in the quarters ahead, as sales continue to slip relative to consensus amid the challenges mentioned in today's opening missive. U.S. real GDP expanded at about a 1.8% rate in this year's first half. Domestic economic growth in July seemed to reaccelerate somewhat, but, with rising gasoline (now at an all-time Labor Day high) and food prices, a weakening in refinancing activity, and political uncertainty and fears of a fiscal cliff, aggregate growth appeared to moderate in August. The current indication is for similar real GDP growth in third quarter 2012, reflecting weakening capital spending orders (lower in six of the last seven months) to be offset by some improvement in real incomes (up 3% year over year) and a steadily improving residential real estate market. Away from the U.S., two important growth drivers, Europe and China, are likely to prove a drag on (consensus) growth.
I Am Cautiously PessimisticI am concerned that, come the fourth quarter of 2012, the emerging freeze in capital spending orders will reverberate through the production channel and become a freeze on job creation, creating a rippling and negative impact on domestic economic growth. And, while the Fed chairman " has our back," I am less optimistic that most that the Fed's actions will result in the intended benefits. Indeed, I believe that more easing could have a negative aggregate impact on the trajectory of the domestic economy. Some of the potential unintended consequences of another bout of quantitative easing include higher commodities prices, especially of an energy kind, as well as putting more pressure on the savings class. With the likely projected course of domestic growth still subpar over the next two quarters, the recovery remains vulnerable to any of a number of external shocks, which could include Draghi not being able to deliver a recipe to reduce sovereign debt yields(and/or a coordinated growth plan for the eurozone), an Iran-Israel confrontation (and its unfavorable impact on gasoline prices), a Democratic presidential and Senate victory (seen as business- and market-unfriendly) and a harder-than-expected deceleration in China's economy (that would likely result in a sharp drop in commodities and a curtailment in China's participation in buying U.S. debt).
- I am reducing the chances of the two tail events -- namely, a reacceleration of U.S. growth and a U.S. recession in 2013 -- from 5% to 2.5% each (or close to zero). I use 2.5% probabilities because almost no scenario has a zero chance of occurring.
- I am increasing the probability of sub-1.5% 2013 real GDP growth from 40% to 55%. This scenario becomes my new baseline expectation.
- I am reducing the likelihood of my previous baseline, muddle-through scenario (defined as 2013 real GDP growth of between 1.5% and 2.5%) from 50% to 40%.