Concerns of a stock market crash are growing ahead of this week’s second-quarter gross domestic product (GDP) report, due Aug. 30. The report will inform economists of the impact of the Federal Reserve’s historic rate-hike campaign over the past year and a half or so, as well as provide some insight into the central bank’s future monetary policy changes. As such, the report will likely have a notable effect on equity markets, which have proven increasingly sensitive to economic data releases this year.
What do you need to know this week’s GDP report?
Well, according to the advance estimate, the U.S. economy expanded by 2.4% in the second quarter of the year. This represents a red-hot pace of growth for the world’s largest economy, even surpassing the country’s 2% Q1 production increase.
While 2.4% is by all accounts a lofty figure, it may still be a conservative estimate, given some recent speculation on U.S. GDP. Indeed, earlier this month, the Atlanta branch of the Fed projected whopping 5.9% GDP growth in the third quarter of the year, citing advancements in residential real estate investments. If true, this would easily make Q3 the strongest quarter for U.S. production in the past several years.
With that in mind, it’s possible that the second-quarter 2.4% prediction may in fact be underplaying the actual figure. If you recall, GDP has managed to surpass forecasts the past several readings, including the Q2 advance estimate which previously sat at 1.8%. This was also true in Q1, with GDP estimated at 1.1%, only to come in at 2% for the actual reading.
Will This Week’s GDP Report Prompt a Stock Market Crash?
While strong GDP growth is certainly a primary objective of just about any modern economy, there are some caveats.
Indeed, growth is typically associated with higher inflation, something the Fed’s rate hikes were specifically designed to impede. The fact is, higher interest rates should, all things equal, slow down economic growth. It’s the reason why, entering 2023, most economists believed a recession would inevitably hit the country. As such, the notion of accelerating GDP may belie a more drastic monetary response.
“While good news for the near-term real GDP growth outlook (Q3 is likely to print at least 2% annualize and probably stronger), the resilience of the US consumer complicates the picture for the Fed,” Citi US Economics Research Analyst Gisela Hoxha wrote following the Atlanta Fed’s near 6% projection. “Upside surprises to demand for goods mean increasing upside risk to prices for a category of inflation that has been reliably soft this year.”
The stock market has been particularly reactive to hawkish policy indicators this year. Just last week, stocks took a surprising downward swing after Boston Fed President Susan Collins suggested that the Fed will likely maintain its elevated interest rates — and potentially even pass more hikes this cycle. Perhaps most shocking, the bearish downturn came the same day as Nvidia’s (NASDAQ:NVDA) blowout earnings report, one of the most-anticipated earnings calls all quarter.
There’s clearly more work to be done to get inflation to the Fed’s 2% goal. Until then, even positive economic indicators like GDP could bring sour implications of more rate hikes to come. Currently, the benchmark rate is at between 5.25% and 5.5%, the highest level in decades.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
