Yesterday, the Atlanta Fed GDPNow Model upped its forecast for first quarter GDP from 2.3% to an impressive 3.4%.

Does anyone buy that forecast?


Latest forecast: 3.4 percent — February 1, 2017

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 3.4 percent on February 1, up from 2.3 percent on January 30. After this morning’s ISM Report On Business from the Institute for Supply Management and the construction spending release from the U.S. Census Bureau, the forecasts for first-quarter real personal consumption expenditures growth and real private fixed investment growth increased from 3.0 percent to 3.8 percent and 4.7 percent to 8.0 percent, respectively.


Item 30-Jan 1-Feb Change
1-PCE 2.08 2.62 0.54
…..2-PCE Goods 0.80 1.22 0.42
…..3-PCE Services 1.28 1.40 0.12
4-GPDI 0.32 0.88 0.56
…..5-Fixed Investment 0.75 1.28 0.52
……….6-BFI 0.65 0.99 0.34
……………7-Equipment 0.39 0.62 0.23
……………8-Intellectual Property Products 0.23 0.24 0.00
……………9-Structures 0.02 0.13 0.10
……….10-Residential 0.11 0.29 0.18
11-Government 0.25 0.23 -0.02
…..12-Federal Govt 0.14 0.13 -0.01
…..13-&L 0.11 0.10 -0.01
14-Imports -0.89 -1.08 -0.19
…..15-Goods imports -0.76 -0.94 -0.18
…..16-Services imports -0.13 -0.14 -0.01
17-Exports 0.60 0.73 0.13
…..18-Goods exports 0.44 0.56 0.12
…..19-Services exports 0.16 0.17 0.01
Change in net exports -0.30 -0.35 -0.06
Change in inventory investment -0.44 -0.40 0.04
GDP Nowcast 2.34 3.38 1.03
Final Sales 2.78 3.78 0.99

Exports, imports, government, and inventories did nothing. Personal Consumption Expenditures (PCE), and Gross Private Domestic Investment added 1.1 percentage points.

This is the largest jump I have seen watching GDPNow.

ISM Report

The ISM numbers were very good, but not enough to trigger that jump in GDP estimates.

From Econoday

The ISM manufacturing report, in line with a run of regional reports, is signaling the strongest conditions in the factory sector since the oil-price collapse of 2014. The composite index for January is 56.0 for a sizable 1.5 point gain and the highest reading since November 2014.

New orders at 60.4 vs 60.3 in December is also a high since November 2014 and is the first back-to-back 60 showing since December 2013. Employment is also strong, up a sharp 3.3 points to 56.1 for the highest reading since August 2014. Inventories are steady as are delivery times which have been slowing in line with rising activity. Input costs are showing increasing pressure, in line with rising costs in other anecdotal reports.

The 2014 collapse in the oil sector drove down energy equipment and had a lasting but now fading effect on the factory sector. Yet anecdotal reports offer only advance indications on factory activity, not definitive ones where the readings so far have yet to show much post-election pop. Factory orders on Friday will offer the government’s results for January and are expected to show a gain.

Construction Spending

The Construction Spending report was for December, and thus pertains to 4th quarter 2016 GDP estimates, so I paid little attention to it.

Curiously, spending fell 0.2 percentage points. From Econoday …


Construction spending fell 0.2 percent in December but details show welcome gains for housing. Spending on new single-family homes rose 0.5 percent in the month with multi-family spending up 2.8 percent. A negative on the residential side, however, is a 0.6 percent dip in home improvements.

More negative pull comes from public construction spending which fell a sharp 1.7 percent in the month. Educational spending fell 2.2 percent with highways & streets down 0.6 percent. Private nonresidential categories are mixed with total spending for this component unchanged in the month.

Spending on new home construction will have to improve further to ease the very tight supply in the new home market. Watch for construction payrolls, one possible highlight of Friday’s employment report.

Construction Spending Volatility

The problem with construction spending reports is they are total bullsheet as we have seen on numerous occasions. We still have pending revisions dating back 10 years.

The single-family numbers do not even match recent reports.

On January 26, I reported New Home Sales Plunge 10.4 Percent: In Search of Good News.

On January 24, I reported Big Thud in Existing Home Sales: Lack of Supply? Inventory Hits Record Low.

Existing home sales are reported at closing, new home sales at contract signing.

When people buy existing homes, they remodel. When people buy new homes construction activity soon follows.

Take the Under

I do not buy this enormous jump in predicted GDP for one second.

On Friday, the New York Fed will post its “Nowcast” GDP forecast. Its latest forecast is 2.7% for first quarter, as of January 20. It did not make a forecast last Friday because of this week’s FOMC meeting.

For 4th quarter of 2016, the final Nowcast was at 2.1%,. GDPNow was at 2.9% off a full percentage point.

When looking at this latest GDPNow forecast of 3.4%, I will place my typical mental bet when looking at these hugely optimistic forecasts: “Take the under, way under”.

Mike “Mish” Shedlcok