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Unusually harsh winter slowed the U.S. economy, and the U.S. Commerce Department’s final estimate of first-quarter GDP was revised downward from an annualized contraction of 1 per cent to a 2.9-per-cent rate.

Fred Lum/The Globe and Mail

Investors didn't panic after the U.S. economy shrank an alarming 2.9 per cent in the first quarter, at an annualized pace. Will they keep their cool if the economy also disappoints in the second quarter?

Economist Gary Shilling doesn't think so: "A low second quarter real GDP number will kill the conviction that the first quarter drop was only an anomaly and it will spawn agonizing reappraisals for the rest of the year," he said in his latest note. "It could put the Fed on hold at least into 2016 and be great for Treasury bonds. But for stocks, look out below!"

That's right – Mr. Shilling is a contrarian, pushing aside the consensus expectation that gross domestic product will expand by 3.1 per cent in the second quarter, as the economic benefits of a decent spring push aside the economic drag of a brutal winter. A preliminary reading will be released on Wednesday.

Story continues below advertisement

According to Mr. Shilling, the economy has hardly been dazzling. Consumer spending, which accounts for more than two-thirds of GDP, is growing slowly, perhaps by 1.3 per cent during the quarter. Blame it on absent real wage growth as job creation favours generally low-paid positions.

Meanwhile, federal and state spending continues to fall and durable goods shipments rose just 0.5 per cent. He estimates that residential construction was probably weak in the second quarter, following declines in the fourth and first quarters.

As well, he said that net exports – or the difference between U.S. exports and imports – were weak in April and May; and even an improvement in June would still knock off half a percentage point from annualized second quarter GDP.

Add it up, and unless there was a big jump in inventories, the economy likely expanded closer to 1 per cent in the second quarter, Mr. Shilling said. "It could even be a negative number."

While Mr. Shilling's pessimistic view is definitely well below the consensus among economists, he's not alone in his concerns. David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, offered a similar assessment on Thursday: "It is worth highlighting that there are material risks that we could be in for another disappointing report," he said, pointing to consumer spending, net trade and the possibility of a negligible impact from inventories.

But Mr. Rosenberg is far more upbeat, arguing that the underlying economy is still strong, even if second quarter growth disappoints.

Mr. Shilling, on the other hand, isn't so sure about that, which is why he believes that the Federal Reserve could be holding its key interest rate at about zero per cent for considerably longer than economists – and investors – expect. And that's why he's bullish on bonds.

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