Previously, we had been relatively sanguine, but our new back-of-the-envelope calculation for second-quarter gross domestic product growth comes to a meager 0.5% seasonally adjusted annual rate, compared with a 1.8% annual rate in the first quarter. Granted, our estimate could be too pessimistic if exports reverse recent declines and imports continue to fall.
But make no mistake, growth appears weak and could enter contraction territory if the Federal Reserve dares to start squeezing the money spigot. Some are expecting a pullback in the Fed's quantitative easing program come September. We doubt it, even if inflation inches higher. Growth is simply too anemic to risk taking the punch bowl away before the party has started.
Increasing our concern was news yesterday from the Commerce Department that retail sales in June rose just 0.4% and that the gain was almost entirely due to auto sales (a good thing) and gasoline sales (a bad thing because it reflected higher prices). Economists had expected a 0.9% gain in June retail sales.
And today the Labor Department said the consumer price index rose 0.5% in June, again largely the result of higher gasoline prices. That number was in line with expectations and shouldn't worry the dovish majority of Fed policy makers.
We think the sequester and higher fuel prices are big hurts that behooves the Fed to continue using its jaws of life policy tools to keep economic activity above water. Whether that's enough to keep stock market bulls in charge is beyond us, but trimming positions in winners wouldn't be a sin.