I hope the model is wrong.
The Atlanta Fed’s GDPNow model, which forecasts GDP growth in the US, dropped to 0.6% seasonally adjusted annualized GDP growth for the first quarter. This means, if economic growth at this rate continues for an entire year, the US economy would edge up only 0.6% for the year.
As more data for the quarter is released, the model becomes a more accurate predictor of GDP growth, as measured in the first estimate for that quarter by the Bureau of Economic Analysis (BEA). So now the first quarter is over, and more data for the quarter is piling up, and the GDPNow forecast is spiraling down in direction of zero.
The forecast dropped by half from April 4, when it was still 1.2%. I added the red arrow to the chart to show just how fast and how far it fell in the past seven weeks, from 2.5% to 0.6%:
The GDPNow model aggregates forecasts of 13 sub-components of GDP. These are the factors that caused the slide since April 4:
- April 5 – Data on light vehicle sales from the Bureau of Economic Analysis: This parallels to some extent my coverage of the auto industry that is now at the cusp of sliding into a nasty quagmire or worse.
- April 5 – ISM Non-Manufacturing Report on Business, a measure of the service economy: the index dropped 2.4 percentage points to 55.2 in March (above 50 = growth, so this was still growth, but slower growth than expected).
- April 7 – Wholesales trade report by the Commerce Department on wholesales and inventories: sales up, inventories up too.
- April 7 – Employment report: only 98,000 jobs were created in March, a little over half of what economists were expecting.
The Atlanta Fed’s model found that since April 4:
- The forecast for first-quarter inflation-adjusted consumer spending growth dropped by half, from 1.2% to a miserable 0.6%.
- The forecast for first-quarter inflation-adjusted nonresidential equipment investment growth dropped from 9.7% to 5.6%.
So how bad is annualized real GDP growth of 0.6%? It’s less than half the miserable 1.6% growth rate of 2016, which had matched the lowest growth rate since the Financial Crisis. So anything near 0.6% would be the worst since the Financial Crisis.
It would also be substantially below US population growth. Hence, per-capita GDP, which is how individuals experience the economy, would actually decline.
A month ago, when the Atlanta Fed’s GDPNow model spiraled down to 1.2%, I wrote: “We hope it’s just a brief dip in the data.” But that dip wasn’t brief, and it just got deeper.
The GDPNow forecast does not at all jibe with the business and consumer sentiment surveys that have jumped to multi-year super-optimistic highs since November. Economists and Wall Street have put a lot of faith in this magnificent ebullience as driver of consumer and business spending. And stocks have soared. But the data piling up show once again that sentiments are just sentiments. Reality is another matter. And reality for now in the first quarter is a pretty dreary affair.
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