Is Upside Surprise In Store For GDP?

Ibd Wed Jul 23, 6:45 PM ET

Economy: Everyone agrees the economy's in the tank and headed for recession -- if not already in one. The first quarter was weak, and the second quarter will be weaker, the argument goes. Hold on just one minute.

We said in December 2007 that the economy's not in recession, that it has plenty of momentum that will be helped if the Fed aggressively cuts interest rates to keep the housing mess and high oil prices from dragging us into a downturn. No need to panic.

So far, so good.

To be sure, the first three months of this year were weak, with GDP growing at a tepid 1% pace. And businesses did cut 325,000 jobs in the first half, lifting unemployment to 5.5%.

Given all this glum news, it seems, we must be in recession. A recent national poll by the American Research Group found that 68% of those queried thought the U.S. was in a recession. Indeed, a casual survey of Google News returned 46,137 hits for the word "recession." It's in the air.

But the prevailing gloomy consumer sentiment seems to be at odds with what's actually happening right now in the economy, at least as far as the data go.

John McCain's adviser, economist and former Sen. Phil Gramm, got canned for suggesting that the only recession we had was "mental."

Turns out, he's right.

The U.S. in the second quarter, while not booming, seems to be growing quite nicely, thank you. Not even close to recession.

A consensus estimate of economists by Bloomberg puts second-quarter GDP at about 2.2%. First Trust Advisors' Brian Wesbury, who is admittedly at the extreme end of the expectations spectrum, thinks GDP growth will be 3%.

Not only not a recession, but quite respectable.

This isn't based on wishful thinking, but on hard data. Many of the core elements of gross domestic product -- consumer spending, business investment, government spending and trade, to name a few -- are all growing. They will add a lot to GDP this quarter.

Autos and housing? Yes, clearly they're in big trouble right now, suffering double-digit sales declines and huge layoffs. The more than doubling of oil prices hasn't helped.

But the rest of the economy seems to be doing OK -- not spectacularly well, but OK.

We might add that the Fed seems to have put a bottom under the economy by slashing interest rates from 5.25% to 2% in less than a year, and by pumping hundreds of billions of dollars in liquidity into the ailing financial system. President Bush's tax cuts clearly continue to bolster consumers, another key bit of support.

In short, people may think we're in a recession, but we aren't.

Nor is it clear we will be this year. Investors increasingly see the U.S. weathering the storm. As the Intrade.com futures chart above shows, investors just months ago gave a nearly 80% chance of recession hitting the U.S. in 2008; today, it's down to a 17% probability.

Each day we're not in a downturn makes it less likely we will enter one. And someday, those who perpetually forecast economic Armageddon in the very next quarter, and who are wrong, will have to admit it. The economy's more resilient than they think.