On May 1, the GDPNow Model came up with an initial forecast of 4.3% for second quarter GDP.
My first reaction was “here we go again”. That was quickly followed by “I’ll take the under, way under” bet.
Let’s take a look at the latest forecast, why I think the model is wrong, and some interesting charts of GDPNow forecasts vs what actually happened.
I emailed Pat Higgins, the creator of GDPNow about the initial forecast. He could not say too much because of an FOMC blackout, but here is his email.
Hi Mish,
The March growth rates for each of private permanent-site residential, private nonresidential, and state+local construction spending put in place were each lower than the model was predicting on April 27th in the final model nowcast for the first-quarter. But all three of these growth rates for February were revised up from the previous construction spending report. I can’t do a deeper analysis on the implications for the GDPNow forecast for the second quarter because of the blackout on FOMC communications until this Friday. Hope this helps a little though.
Best regards,
Pat
Weather Related GDP Again
Prior to seeing the initial GDPNow forecast I had emailed Pat my comment on construction spending: “The second quarter is not off to a good start. However, the GDP models may go haywire once again by not factoring in weather-related phenomenon.”
GDPnow Initial and Final Forecasts vs Actual
I created the above chart from the “tracking archives” spreadsheet from GDPNow downloadable data. I added a few columns (Initial, Final Actual) to the sheet.
My friends at Advisor Perspectives helped with data labels.
In the above chart, Actual means the Advance GDP estimate, not the final revised GDP number.
GDPNow Track Record
4.3% Really?
In Investigating Weather-Related Effects on Construction Spending I posted this chart that explains the jump in the initial GDPNow forecast.
Weather Effect?
This was a strong report and even stronger than it looks at the first glance. However, I caution everyone to not read too much into this strength.
December was unusually cold. January was unusually warm as was February. Seasonal adjustments do not factor in weather.
Second Warmest February in 123 Years!
Please consider Assessing the U.S. Climate in February 2017.
During February, the average contiguous U.S. temperature was 41.2°F, 7.3°F above the 20th century average. This ranked as the second warmest February in the 123-year period of record. Nearly one-quarter of the U.S. was record warm in February. Only February 1954 was warmer for the nation at 41.4°F. Between December 2016 and February 2017, the average temperature across the contiguous U.S. was 35.9°F, 3.7°F above average, the sixth warmest winter on record.
Estimate Way High
My comment on the construction data was “Before anyone gets too giddy over these numbers, bear in mind very unusual seasonality factors. Builders build when the weather permits, and the weather was very cooperative this Winter.”
Other evidence suggests the same thing.
- Auto Sales Puke Again: Year-Over-Year Totals: GM -6%, Ford -7.2%, Toyota -4.4%, Fiat-Chrysler -7.0%
- Consumer Spending Flat, PCE Inflation Weakest Showing In 16 Years, Rate Hike Odds Rising.
- Regional Lender Loan Crash: Nearly Every Major Regional Bank Missed Lending Estimate.
- Subprime Credit Card Losses Bite Capital One: Income Down 20%, Charge-Offs Up 30%.
Auto sales make up approximately 20% of consumer spending. It was the massive slide in auto sales in the first quarter that caused me to dramatically lower my GDP estimate long before anyone else did.
The April auto sales report (link #1 above) came out today. It is the first hard data point for the quarter.
Consumer spending for March (link #2 above) came out yesterday.
I do not have an estimate for the second quarter yet, as one data point is insufficient. But once again I think weather-related events, this time in housing, got the quarter off to another amazing pie-in-the-sky forecast.
Think Outside the Model
I have learned much from the Atlanta Fed model. In addition, Pat Higgins has been very generous with his time, answering questions.
Instead of blaming the model, learn the model’s weaknesses and temper the model forecasts with a bit of human analysis.
Think outside the model. You can only do that if you understand situations when the model is highly likely to be wrong, like now!
Mike “Mish” Shedlock
Well thought out and presented Mish. I appreciate your insight and your Micro analysis. I approach things from a Macro level. Given all the headwinds (high debt levels, political uncertainty, tight skilled labor market), I continue to expect GDP growth of 1-2%.
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Zion National Park Autumn – Great White Throne
https://mishmoments.com/2017/05/02/zion-national-park-autumn-great-white-throne/
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it’ll take time after 8 years of manipulating,cooking,rigging the data to protect the ruling junta,it’s gonna take time to “derig” the data.Real gdp is flat to negative with zero demand across the board,eventually with a semi competent administration on board maybe we’ll finally start to get some legit data,not the complete nonsencical bs of the last 8years
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What is GDPNow supposed to tell us? Is it the GDP for some very small unit of time (e.g. a day), or a continuously updated estimate for the GDP for the entire quarter?
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O/T The Spanish government advises that any set of Brexit agreements will not come into force until 2023, making it seem that the only points that will be dealt with to 2019 are bills and ( hopefully) making sure a basic framework remains in place ( for border control etc.) .
http://politica.elpais.com/politica/2017/05/02/actualidad/1493752447_515518.html
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Is it possible that moving forward with the economic statistics between now and June, if they continue to be somewhat weak but not dramatically so, the Fed could still hike for three possible reasons? They want to prick the equity market bubble before it gets even worse, perhaps have more room to cut if a recession becomes inevitable, and finally to improve their image that’s been under attack for many years now.
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It should be apparent that what we really need is more free stuff, more entitlements, more creative profits from Wall street, more money created from nothing by the Fed and its government agents. All we need is MOAR.
Is ANYONE talking of producing more of anything but debt?
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Initial forecast of 4.3% for second quarter GDP.?
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Trying to guess the GDP is a fool’s game. You are trying to be the best guesser. The system is playing you like a flute. You might as well put $1000 on the nose of the first horse that takes a dump on the track at post time as he’s headed into the starting gates. It’s an act of futility. Instead of guessing in advance why not just wait until the numbers are released and then tell us why the numbers are bogus? It would make more sense.
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GDPNow reports seem counterproductive to determining what is really happening in the economy. I would either smooth their result, by reporting a 3-month average, or just not even quote them. Their expectations are too volatile and therefore, pretty worthless.
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The New York and Atlanta estimates were out more than 2% from each other on Q1 and now they are again out more than 2% for Q2 but the other way!
You gotta wonder whether they are worth the effort when the results vary so much that they become meaningless.
I think they need to refine the models.
It seems like the models must go to zero at the beginning of each quarter such that early information has a huge impact. This would be the only explanation for the Atlanta numbers going from .2 to 4.7 overnight. They should likely keep the Q1 information in place for Q2 until the Q1 information is superceded by new Q2 information. Basically Q1 information is not irrelevant to Q2 as it is the best estimate of Q2 until new numbers come out.
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