Economic growth was moderately higher in the second quarter than previously reported and slightly better than expectations. The economy grew at a 1.3% annualized pace during the quarter, resulting in constrained GDP growth of less than 0.9% for first half of 2011.
In recent months, economists have generally reduced their expectations for the rest of the year to an annualized rate of growth of about 2% in response to recently weaker economic data. Given the various sources of risk to growth, expectations are likely to remain subdued for some time.
The risk of a recession both in the U.S. and globally remains heightened, and our view remains less optimistic than the consensus. The U.S. and global economy appears to be one shock away from recession in an environment in which the potential for such a shock is also high.
As perceptions of the situation in Europe swing between fear of the crisis deepening and cautious optimism that a solution will be reached, the near-term outlook for the stability and strength of the European economy remains in a state of flux. As investors assess the risks in the U.S., Europe, and beyond, stock prices have been volatile, reflecting a market deliberating between further risk and relative opportunity.
While the economic outlook is increasingly troublesome, it’s not yet clear that the U.S. has actually entered a recession. As the outlook evolves in the weeks and months ahead, market volatility is likely to remain heightened. Although stocks have sold off, the potential exists for further downside from here if and when it becomes apparent that a recession has arrived.