After two quarters of contraction, US gross domestic product (GDP) is on track to recover in the third quarter, based on the median estimate for a set of nowcasts compiled by CapitalSpectator.com. But there’s a joker in the deck: the implied Q3 estimate based on the latest PMI survey data points to an accelerating slide in output that anticipates a deep recession.

The PMI report is an outlier at the moment and so its warning should be viewed cautiously. Although the US Composite PMI is considered a GDP proxy, its dark profile for August isn’t showing up in other Q3 GDP nowcasts, at least not yet. It’s possible that the PMI report is correct and its counterparts are overly optimistic and will soon adjust to the bearish macro conditions. But for the moment the median of these forecasts is the best estimate. Why? Outliers tend to be off the mark. By that measure, the US economy is set to expand by 1.6% in Q3 (seasonally adjusted annual rate).

If the median nowcast is correct, the output is on track to post the first quarterly increase in 2022. Note that today’s median estimate is up from the previous +0.6% nowcast (Aug. 10).

Encouraging news, although the deeply negative PMI outlook can’t be dismissed, at least not entirely. Rather, it’s a reminder that there’s plenty of uncertainty about how the final Q3 results stack up. With multiple risk factors roiling the economy — high inflation, ongoing interest-rate hikes, and blowback from the war in Ukraine — the path ahead remains highly fluid.

“August flash PMI data signaled further disconcerting signs for the health of the US private sector,” advises Siân Jones, a senior economist at S&P Global Market Intelligence, which publishes the PMI numbers.

“Demand conditions were dampened again, sparked by the impact of interest rate hikes and strong inflationary pressures on customer spending, which weighed on activity,” Jones explains. “Gathering clouds spread across the private sector as services new orders returned to the contractionary territory, mirroring the subdued demand conditions seen at their manufacturing counterparts.”

Using the PMI in isolation, and running its history through a regression model in connection with GDP, implies that US output will contract by a hefty 5.7% in Q3. That almost certainly overstates the downside risk, based on what we know at this point. But the deep decline in business activity signaled by PMI, based on survey data, highlights the precarious state of economic conditions.

All the more reason to watch the upcoming hard numbers for additional perspective on how to interpret the PMI warning. That starts with tomorrow’s weekly update on US jobless claims and Friday’s July release on personal income and spending.

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