The Atlanta Fed's GDPNow forecast of 1Q growth has fallen to 1.2% from 3.4% on February 1. What is behind this precipitous drop and should we be concerned about a slowdown from 1.9% in 4Q?
The Atlanta Fed publishes a historical breakdown of the contributions to the GDPNow estimates. The total drop in the GDPNow estimate is 2.1% (3.4% - 1.2% does not equal 2.1% due to rounding). The majority of the decrease, 1.4% of 2.1%, stems from PCE, or consumer spending on goods and services. The drop is PCE makes sense since it's the component of GDP. If more of the drop had come from inventory (-0.4%), government spending (-0.3%) or net exports (-0.1%), then it would be less concerning.
The next GDPNow update is March 15 which is 44 days before the GDP report is scheduled to be released on April 28. FRB Atlanta publishes the report below on forecast error over time.
So the current forecast is 1.2% plus/minus 1.4%, a fairly wide band. Upcoming GDPNow updates are scheduled on March 15, 16, 24 and 31.
Are other GDP forecasts also showing weakness? The NY Fed's Nowcast stands at 3.1%, not showing the recent slide in growth GDPNow is picking up. The Cleveland Fed's monthly forecast is 1.8%. Moody's Analytics forecast is 1.0%, and Moody's forecast has come down quite a bit since February, similar to GDPNow.
CNBC Rapid Update is a weekly survey of Wall Street economists' estimates of current quarter GDP growth. The CNBC Rapid Update stands at 1.5%. The WSJ Economic Forecasting Survey polls Wall Street monthly and is currently 2.2%. The Philadelphia Fed publishes a quarterly Survey of Professional Forecasters last updated February 10, which has 1Q GDP growth at 2.2%. One nice element of this report is it shows the change in the forecast from the previous forecast prior to the election.
The change in the current forecast from the previous shows when economists believe the pickup in growth will occur. The growth forecast for 2017 only increased from 2.2% to 2.3%, with 1Q unchanged. The larger increase in growth is in 2018 and 2019 which both increased from 2.1% to 2.4% and 2.6% respectively.
There is a disconnect between the business and consumer surveys and the hard economic data right now. Part of this difference is due to timing because easier financial conditions, improved confidence and expectations for fiscal stimulus take time to feed into the economic data. Therefore, the growth acceleration story remains intact even with a weak 1Q GDP print. The question is how long the market will wait for the strong data to surface. The disconnect between the perception of growth and the actual data must narrow eventually. Either the data will strengthen to confirm the pickup in growth, or the perception of an impending bump in growth will come back to the reality of continued subdued performance.
The stock market has priced in a pickup in economic growth subsequent to the 2016 Presidential election. If this acceleration in growth does not materializing at some point, the market may be vulnerable to a reversal.
Michael Grove, CFA