The Atlanta Fed GDPNow Model for first quarter GDP took a dive to 2.7% today from 3.4% on February 1. Let’s investigate why.

Latest forecast: 2.7 percent — February 7, 2017

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 2.7 percent on February 7, down from 3.4 percent on February 1. The forecasts for first-quarter real personal consumption expenditures growth and real private fixed investment growth fell from 3.8 percent to 3.1 percent and 8.0 percent to 5.8 percent, respectively, following the data releases on February 2 and 3.

gdpnow-2017-02-07

The above text does not explain what happened. So let’s dive into the data spreadsheets for more clues.

What Happened?

gdpnow-2017-02-07a

  1. Light vehicles sales took off 0.3 percentage points on February 2.
  2. The employment report and/or the Nonmanufacturing ISM report took off 0.4 percentage points.
  3. Today’s balance of trade report had no impact.
  4. Back on February 1, the GDPNow forecast jumped to 3.4% from 2.3% based on construction spending and/or the Manufacturing ISM report.

Auto and ISM Analysis

The decline in autos on February 2 is easy to understand.

The non-manufacturing ISM report posted a reading of 56.5, inline with consensus and generally thought to be strong. The employment component rose from 52.7 to 54.7. Business activity was a solid 60.3.

Employment Analysis

If we rule out ISM,  the 0.4 percentage point decline on February 3 had to have come from the employment report. However, the employment report was also widely believed to be strong.

The headline job number came in at beat-the-street estimate of +227,000 jobs.

My assessment was much different: Shocking Fact in Today’s Job Report: Employment Stalls

Initial Reaction

Today’s employment report shows a robust increase of 227,000 jobs. The good news stops there. The rest of the report was horrific.

The big news is in employment where the three-month trend worsened.

In the last three months, employment has only risen by a grand total of 33,000. Employment in January declined by 30,000. For the entire year, employment rose by only 1,548,000. The average increase from a year ago is only 129,000 per month.

These trends have now gone on long enough they should not be ignored. But they are.

Instead, media is gaga over the beat-the-street headline number of +227,000 jobs.

I posted this chart along with my analysis.

employment-stalls

Here were my “final thoughts” on the jobs report.

Final Thoughts

This report was shockingly bad. Employment growth was +129,000 on average from a year ago, +79,000 per month since March, and only +11,000 per month for the last three months.

Employment has stalled.

My assessment fits with GDPNow, but I will ask the Atlanta Fed for confirmation.

Rocky Start

  1. Following the Auto report I posted 1st Quarter 2017 GDP Off to Rocky Start.
  2. Following the construction report I commented First Quarter GDP Forecast 3.4 Percent: How Many Believe That?

I do not buy that construction report, commenting at the time: 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”.

Construction reports are extremely volatile. Moreover, the single-family numbers in the report do not match new home sales numbers. For further discussion, please click on link #2 above.

On deck, I foresee a big dip in industrial production. Bad weather that added to GDP in December (and extrapolated forward) will be taken back in January.

Mike “Mish” Shedlock