On Wednesday, I asked a handful of bloggers and economic writers their estimate for first quarter GDP.
ZeroHedge was the only one willing to publicly take a stance. I told him my forecast on the same day, but I had already announced my forecast on live radio on Monday.
First, let’s look at the two most widely followed forecasts.
GDPNow Forecast: 0.6 Percent — April 7, 2017
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2017 is 0.6 percent on April 7, down from 1.2 percent on April 4. The forecast for first-quarter real GDP growth fell 0.4 percentage points after the light vehicle sales release from the U.S. Bureau of Economic Analysis and the ISM Non-Manufacturing Report On Business from the Institute for Supply Management on Wednesday and 0.2 percentage points after the employment release from the U.S. Bureau of Labor Statistics and the wholesale trade release from the U.S. Census Bureau this morning. Since April 4, the forecasts for first-quarter real consumer spending growth and real nonresidential equipment investment growth have fallen from 1.2 percent and 9.7 percent to 0.6 percent and 5.6 percent, respectively.
FRBNY Nowcast: 2.8 Percent — April 7, 2017
- The FRBNY Staff Nowcast stands at 2.8% for 2017:Q1 and 2.6% for 2017:Q2.
- News from this week’s data releases brought the nowcast for Q1 down 0.1 percentage point while the nowcast for Q2 was virtually unchanged.
- Negative contributions from both imports and exports as well as from today’s nonfarm payrolls offset the positive contribution from the ISM manufacturing employment index.
FRBNY Nowcast Details
GDPNow Details
On April 7, GDPNow dropped 0.4 percentage points due to auto sales and ISM. I have a question into Pat Higgins at GDPNow for a breakdown.
If ISM had a positive impact, the amount of decrease attributable to autos is greater than 0.4 percentage points. My assumption is ISM did not change the numbers much.
Retail Sales Numbers
Nowcast may claim that the retail sales reports should pick up car sales, but retail sales lag car sales, they are subject to greater revisions, and skipping auto sales numbers also skips fleet sales and other commercial sales.
For the two dates applicable to both GDPNow and Nowcast, retail sales subtracted a total of 0.187 percentage points from Nowcast but 0.50 percentage points from GDPNow.
Combined, the effect is 1.31 percentage points.
Model Flaws
- Nowcast uses no hard auto data: This is a serious error. Autos account for 20% of retail sales and fleet sales are also very important.
- Incorrect reliance on unemployment rate: People dropping out of the labor force and actual employment rising can both move the number in the same direction. Both things cannot mean the same thing.
- ISM vs PMI: Both reports measure the same thing, yet those reports signal very different things. At least one of them is wrong. GDPNow and Nowcast both rely on ISM even though the PMI reports have been more accurate, at least recently.
- The GDPNow and Nowcast models both suffer from an inability to think. The weather provides a nice example. In December, the weather was unusually cold, causing Industrial Production numbers to soar (heat and electric production), for the entire upcoming quarter. I estimated in advance, January would take away those numbers. My assertion played out, at least for GDPNow. I still cannot account for Nowcast.
ISM vs PMI
I discussed the difference between ISM and Markit’s PMI estimates recently, for both manufacturing and non-manufacturing (services).
- April 3: Markit PMI vs. ISM Fantasyland GDP Projection: Stagflation Lite?
- April 5: Another ISM/PMI Divergence: Non-Manufacturing
On April 3, the ISM made this statement: “The past relationship between the PMI® and the overall economy indicates that the average PMI® for January through March (57 percent) corresponds to a 4.3 percent increase in real gross domestic product on an annualized basis.”
On March 24, Chris Williamson, Markit Chief Business Economist, stated ”The survey readings are consistent with annualized GDP growth of 1.7% in the first quarter, down from 1.9% in the final quarter of last year.”
On April 5, Williamson reiterated “The surveys of manufacturing and services are running at levels consistent with GDP expanding by 1.7% in the first quarter.”
ZeroHedge April 5 Estimate
On April 5, ZeroHedge replied to my request for a number with “Call it 1.3%“. He provided no further explanation, but I did not ask for any.
Mish April 3 Estimate
On Monday April 3, on Coast-to-Coast, live syndicated talk radio, I told George Noory I expected GDP would be 0.6%.
I am frequently on just after 12:00 Midnight, for a few minutes, before regular guests, giving brief economic updates.
I mentioned autos and all of the other numbers in play at the time (GGPNow was 1.2% then, so I was well under the then lowest estimate).
On April 5, I responded back to ZeroHedge “Thanks. You can change it later. I will post 0.6%”
My intent was to write this piece Thursday night ahead of the GDP reports but the unexpected action in Syria got in the way.
On Saturday, I decided to dig deeper into the differences between GDPNow and Nowcast. The result is a more detailed report today.
Word About Oil, Jobs, Upcoming Forecasts
In addition to autos rolling over, and general hard data weakness all around, inflation comes into play.
I expected energy prices would head lower. They haven’t, at least yet. A rise in inflation (the BEA use the PCE deflator not CPI) will subtract from real spending and real GDP. Inflation was part of my downgrade to a 0.6% estimate.
The jobs report did not change my estimate.
Next Friday, we have a trifecta of CPI, Retail Sales, and Business Inventories. Those reports can easily combine to move my forecast down to zero or back above one percent.
My guess now is that something on the order of 0.5% is baked in the cake.
What About Rate Hikes?
Whether this is yet another “transitory” period remains to be seen, but one of these downturns will stick.
Three hikes may not sound like much, but there is over a trillion dollars worth of debt that needs to roll over soon, at increasing rates, at a time when consumers are gasping and minimum wages hikes are in play.
The market expects another hike in June and still more hikes later in the year. I sure don’t.
GDP Predictions
- Mish April 3: 0.6%
- ISM April 3: 4.3%
- ZeroHedge April 5: 1.3%
- Markit April 5: 1.7%
- GDPNow April 7: 0.6%
- FRBNY Nowcast April 7: 2.8%
The “advance” GDP number for the first quarter comes out on April 28.
For a look at how the weather impacted factory utilization and thus GDP estimates, please consider Formulas Don’t Think: Investigating Weather-Related GDP.
In that article, I commented on cold weather in December followed by warmer than usual weather in January.
For reasons I do not understand, GDPNow followed my model of unwinding the weather-related effects, but Nowcast didn’t.
Meanwhile, Don’t Worry Weakness is Transitory: Fed Expects a Second Quarter Rebound, Higher Equity Prices.
Mike “Mish” Shedlock
So you are telling us that none of you have a clue.
No one has a crystal ball, genius.
I suspect one of them might be close.
The perfect definition of an imaginary number, GDP
You folks are attempting to use logic to predict a gamed number.
That’s always a losing proposition.
If you hit it, you’re not skilled. You’re just lucky. It’s like picking a winner in a 12-horse race just based on the animal’s assigned number excluding all other factors.
No idea why ZeroHedge responded with a guess. I gave him more credit than that. He should know better.
Mish seems to think another rate hike is predicated on what GDP prints, but based on GDP numbers claiming that we have been out of recession for years, the rate hikes would have occurred a long time ago.
The central economic planners are not in control.
Silly foolish game of chance.
Nothing makes any sense any more.
Reason and logic are worthless in such an environment.
One thing we know for certain: Math wins in the end.
WTF Johnson goes nuts. Since when are we in a position to arbitrarily demand the removal of a foreign head of state – seriously, this is f*cking crazy.
“Boris Johnson will today lead calls for Russia to face ‘complete international ostracisation’ unless Vladimir Putin removes his support for the Syrian regime.
At a meeting of G7 foreign ministers in Italy, the Foreign Secretary will demand the Kremlin is slapped with sanctions unless it agrees to the removal of Bashar al-Assad within months.”
http://www.dailymail.co.uk/news/article-4396188/Russia-face-complete-international-ostracization.html
The USA is just itching for a war. Putin is being forced into fighting a bully. We don’t even have the legal authority to be meddling in Syria. Has everybody lost sight of that?
Trump is the one pushing the envelope here, while the rest of the world stands on the sidelines and watches.
Make no mistake about it – America is the aggressor. I have to call them as I see them. I’ve always made a really lousy team player.
If a man who outweighed me by 70 pounds of muscle walked up to me and began shoving me around – I would have no other choice but to defend myself in the best way I could.
It’s the nature of the beast.
Yep, except I don’t read it as USA leading, it is just the big guy at the front. There is a whole show which crosses or is above national definitions. It gives me the shivers LF – I have watched closely enough, got caught up enough, to deduce that much without the need for any conspiracy theory to persuade me. Who or what exactly and we are guessing, people only show their faces when it suits, often under guise. To judge someone by their actions in today’s world, and you are already half a mile behind, but to judge them by their words is only for those who wish to be fooled. Thank God we have philosophy and something left of a world around us to live in, maybe one day it will return to peace.
If Guido punches me in the nose, Guido is my known enemy despite the fact that Luciano ordered him to do it.
I’m holding Guido accountable.
My guess is that the FED and the USD project are in trouble – reset and diversion necessary?
Same, but I know Luciano has lots of Guidos, and if I spend my time fighting Guido I will never get round to dealing with Luciano.
“complete international ostracisation” so if China doesn’t go along is it complete? There are 2+ billion customers in Asia vs a dying Europe. Such a hard choice for Putin to make. What will he do?
What will he do as the west openly positions itself to take out Assad, and so sideline Russia in Syria, is maybe what we should be more concerned about.
It’ll be very interesting to watch which side China takes in a military feud between the US and Russia. Or whether China will try to remain neutral. The globe is such an economically incestuous beast in 2017 it’s very difficult to make these predictions. The knee-jerk reaction would be that China would side with Russia ideologically and might even lend a hand militarily – with the transfer or manufacture of weapons.
But at this point I wouldn’t draw any conclusions. Xi and Trump seemingly hit it off at Mar-a-Lago. Who will side with whom? How would it shake out? You may think the answer is obvious. And wind up with egg on your face.
I don’t think China will be in a hurry to be seen as involved, though it is already by proxy ( ties with Iran for example). What I am looking at is how Sunni/Saudi control would take the whole west of Baghdad, with Shia having been handed most of Iraq. Syria is a thorn for regional planning, for Israel too. Possible this is all half choreographed between the big powers… to a degree, but I really don’t think Russia will accept losing its bases and port in Syria and its credibility with Iran , it will put up some kind of fight. Guessing though.
Putin will simply accept whatever sanctions the west wants to put on Russia and stand by Syria. And the west won’t march on Assad as long as you have to march through Russians first.
I just wonder how much of this is pure show to discredit the so-called conspiracy between Trump and Putin to interfere with the election? We know it’s all BS, that Russia couldn’t alter the outcome of a US presidential election even if they wanted to – and in all likelihood had nothing at all to do with whatever hacking that may have occurred.
But the public perception that has been floated is that Putin and Trump are in cahoots. If this little spat may eliminate that public perception and take a lot of heat off Trump.
No idea if that’s what’s going on here. But if so, it’s ingenious. But we will never know. People would not take too kindly to a President firing off $100 million worth the military hardware and killing a handful of people in the process to save his political hide.
That too LF… but what are we to know how each will act by itself around any staged show? Right to be on edge over the proximity of forces in action.
1. China will sit it out. All parties to the conflict in Syria have become beasts.
2. I tend to take a pessimistic view approaching economic forecasts. Mish, I think has the same built-in bias. In fact, I wouldn’t be surprised if the majority of this blog’s readers fall into this category. That’s why we enjoy this blog. (The % of readers who agreed with the false flag explanation for the recent Syrian bombings was an unmistakeable marker).
Steve!
Not sure if being biased towards realism is a bias, or if cynicism is a product of hard experience, but sure to be someone to blame for it all somewhere.
Oh, no, Steve. Assad had a perfectly good reason to use chem weapons on his own people. He’s dragging the U.S. into Syria so he can whop ’em good. Seriously.
Did not realize you were appearing on Coast to Coast…my wife and I listened to the show when Art Bell was moderator. Great show.
Forecast???? It’s no longer a forecast after the quarter is over.
Now it’s just a measure of how far out of whack your model is.
4.3%??? LOL