The Economy Grew 1.5% Last Quarter. One Model Sees 5% This Quarter.

The government’s first look at spring growth landed Thursday morning, and it was soft. Real gross domestic product expanded at a 1.5 percent annual rate in the second quarter, the Bureau of Economic Analysis said in its advance estimate, down from 2.1 percent in the first quarter and below the 2.1 percent forecasters expected. An hour later a different number crossed the wires. The Atlanta Fed’s GDPNow model published its first estimate of third-quarter growth: 5.0 percent.

Both describe the same economy. They point in opposite directions. That is the question hanging over markets a day after the Federal Reserve left interest rates unchanged: is activity cooling toward stall speed, or was the spring soft patch a pause before a reacceleration?

Growth came in at 1.5 percent

The headline number is the plainest evidence for the cooling read. Growth has downshifted for two quarters running, and the second-quarter figure missed the mark. The BEA attributed the deceleration to a downturn in government spending and slower investment and exports.

The monthly income and spending data lean the same way. Personal income rose 0.2 percent in the latest month, down from 0.7 percent, and consumer spending grew 0.3 percent after a 0.9 percent gain. Households are still opening their wallets, but the momentum has thinned.

Policy is not helping. The Fed held its target range at 3.50 to 3.75 percent on Wednesday and signaled no cut is near, and three officials dissented in favor of a tighter stance. Chair Kevin Warsh cited already-tight financial conditions as reason to wait. Restrictive rates left in place weigh on demand the longer they stay.

Private demand ran at 3.9 percent

Look underneath the headline and the picture changes. The cleanest gauge of homegrown demand, real final sales to private domestic purchasers, rose 3.9 percent in the quarter, a sharp step up from 1.7 percent in the first quarter. The parts of GDP that dragged were government outlays and trade, the volatile and less telling components. The part that measures what households and businesses actually bought sped up.

The forward look is stronger still. The Atlanta Fed’s initial 5.0 percent estimate for the current quarter rests on early data and will move, sometimes by a lot, as the quarter fills in. But a first print that high says the hard numbers arriving now are firm, not soft.

The labor market is holding. Initial jobless claims came in at 197,000 last week, below the 200,000 economists expected and near the low end of this cycle’s range. Inflation is cooling at the margin too: the Fed’s preferred core gauge rose just 0.1 percent on the month, and the headline PCE reading eased to 3.7 percent from a year earlier, down from 4.1 percent. Steady jobs and slower prices are the mix a soft landing is supposed to produce.

What the data shows

The second-quarter advance estimate was 1.5 percent, against 2.1 percent in the first quarter and a 2.1 percent forecast. Real final sales to private domestic purchasers rose 3.9 percent, up from 1.7 percent. The Atlanta Fed’s first third-quarter nowcast is 5.0 percent. Jobless claims were 197,000, against a 200,000 forecast and 188,000 the week before. Core PCE rose 0.1 percent on the month; headline PCE was up 3.7 percent on the year, from 4.1 percent prior. Personal income rose 0.2 percent and spending 0.3 percent.

Markets leaned toward the brighter reading. The Nasdaq Composite climbed 2.05 percent on Wednesday and the S&P 500 added 0.88 percent, while the Cboe Volatility Index fell 7.89 percent. Whether that reflected the growth outlook or a strong batch of technology earnings is itself contested.

What would settle it

The calendar fills in fast. The Employment Cost Index for the quarter is due Friday, a read on wage pressure the Fed watches closely. The ISM manufacturing survey lands Monday, and the JOLTS job-openings report follows Tuesday, together sketching whether hiring demand is firming or fading. Apple and Amazon report results Thursday, a direct look at consumer and cloud spending. The BEA will revise the second-quarter figure next month as more source data arrives, and the GDPNow estimate will update through the quarter. The Fed’s next decision comes in September.

For now the same data supports two credible readings of where growth is headed, and the reports due over the next week will start to narrow the distance between them.

This is a general-market summary for information only — not investment advice, and not a recommendation regarding any security.