On Monday, following construction spending and ISM reports, GDPNow upped its estimate of second-quarter GDP from 2.7% to 3.0%.
I am increasingly confident that its estimate is way too high. Let’s take a look at my reasons starting with the latest GDPNow forecast.
GDPNow Latest forecast: 3.0 percent — July 3, 2017
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2017 is 3.0 percent on July 3, up from 2.7 percent on June 30. The forecasts of second-quarter real nonresidential structures and residential investment declined from 1.6 and 2.5 percent to 0.6 and 0.1 percent, respectively, after this morning’s construction spending release from the U.S. Census Bureau. The forecasts of second-quarter real consumer spending and nonresidential equipment investment growth increased from 3.1 and 3.0 percent to 3.5 and 4.7 percent, respectively, after this morning’s Manufacturing ISM Report On Business from the Institute for Supply Management.
Soft Data Silliness
GDPNow, as does the Federal Reserve Bank of New York Nowcast, places way too much faith in soft data reports that are not worth a hoot.
On July 3, I commented ISM vs Markit PMI Divergence Widens Again: Believe Markit.
Had GDPNow been following Markit’s PMI instead of ISM it would not have added 0.3 percentage points to its forecast.
Construction Bump
GDPNow started off its initial forecast on May 1, at an unbelievable 4.3% largely due to huge construction spending revisions for the fisrt quarter.
Although actual hard data never matched that initial forecast, the model only corrected slightly.
Contributions to GDPNow Forecast
On May 1, GDPNow estimated Personal Consumption Expenditures (PCE) as adding 2.22 percentage points to second quarter GDP.
Total the numbers horizontally to arrive at the GDP forecast in blue.
Despite poor retail sales figures and terrible auto sales, the GDPNow model actually added to its PCE contribution estimate.
GDPNOw PCE Contribution vs Historical PCE Contribution vs Change in PCE
The second quarter of 2017 looks nothing like second quarter of 2016. Retail spending reports have been weak and yesterday we had another weak auto report. Ford and GM sales in June were down four five percent from a year ago and essentially flat from May.
There is no sign of a huge rebound in PCE.
Residential Construction
GDPNow has a good track record of estimating residential construction contribution to GDP. Its forecast is headed in the right direction.
However, I have both residential and commercial subtracting from second quarter GDP based on the latest construction spending report. Fred does not have GDPNow’s nonresidential data, so I can offer no chart of historical performance.
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- Construction Spending Flop: Only Public Spending Prevents Outright Disaster
- Personal Income Jumps $71.7 Billion: Who Got Da Money?
- Consumer Spending Barely Moves Despite Jump in Income: Deflationary Headwinds?
Mish Estimate
I have PCE adding 0 to 1.0 percentage points to second quarter GDP. A negative number would not be surprising. I have construction and residential investment subtracting 0.2 percentage points each.
I have construction and residential investment subtracting 0.2 percentage points each.
That would put my estimate 1.8 to 2.8 percentage points lower than GDPNow (a range of 0.2 to 1.2).
I also have considerable doubts about Change in Private Inventories (CIPI) as auto inventories are stacking up at what should be decreasing valuations in my way of thinking.
I suspect the BEA will see things differently. But if CIPI is negative, and my other estimates are correct, we will see negative second quarter GDP.
One more month of data remains, and construction spending can be revised in any direction.
To pick as a single number for now, I will estimate second quarter GDP at 0.8%.
Mike “Mish” Shedlock
Reblogged this on World4Justice : NOW! Lobby Forum..
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Mish…Happy 4th…
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The PCE guess of 0-1% might tie out with government statistics, but it has nothing to do with the cost of living in real life. With bogus numbers going into the GDP calculations, one should expect the resultant GDP to be equally bogus. Between skyrocketing taxes and skyrocketing Obamacare premiums — there is no way the cost of living is only climbing 0-1%. Not arguing if our blog host estimated PCE correctly or not. I am saying that PCE, assuming it is calculated according to government guidelines, is meaningless.
True consumer inflation (cost of living increase) is at least 3-4%, with a good argument that it is as high as 5-6%. PCE is measuring nonsense.
But what should we expect from our failed education system? According to an NPR poll (NPR is ultra liberal, so probably favors democrats)…. According to NPR / PBS poll, only 82% of US voters knew the United States declared independence from Great Britain. DUH!!!
83% of independent / unaffiliated voters knew the correct answer
89% of republicans knew the correct answer
Both those numbers are embarrassing to any half educated person, but the worst subcategory was:
ONLY 72% of registered democrats knew the correct answer
Any questions why these people voted for a criminal solely because of her alleged genitalia? Any questions why they can’t balance a budget?
Seriously, what an absolute condemnation of the public education system. Many Americans don’t know what country we declared independence from.
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Oh man, you had to use the word genitalia….
From
https://leblogalupus.com/2017/07/02/manspreading-la-prochaine-cause-humanitaire-de-lannee/
Or (don’t) read this (graphic, some may find it profane) but I include it as reference to left/liberal/right/religious forum of encounter
https://politica.elpais.com/politica/2017/07/04/actualidad/1499166509_222123.html
Apparently a main point of contention pre-independence was the efforts to tax paper (hence knowledge to society, dissent), similar argument took place in the UK I think.
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http://www.bbc.com/news/entertainment-arts-40504452
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Mish if someone was to ask you why GDP growth is so weak here in America and also weak around the world, you might say that you have been talking about this the last 8-9 years, so how much time do you have? If allowed one word I think you would say “debt.” There have been quite a few books, essays, journals and what not written about how we got here, but few as to we get out of this mess without a total collapse of the world financial system without a depression, worldwide social upheaval, or war. IMO the repeal of the Glass Steagall Act in 1999 in the Clinton administration and whatever took place in the second term of George Bush when Hank Paulson allowed banks to increase leverage way way beyond leverage already provided by the existing futures market, without these two events, greedy bankers would not have been able to create new highly leveraged products such as credit default swaps just to name one, later referred to as financial weapons of mass destruction by Warren Buffett, taking the world financial system into a financial black hole of debt with QEs from central bankers from which we will not recover!
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Your GDP predictions have been very good since you gave up on the recession predictions.
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What? When did we declare independence from Great Britain?
Mish – if you are correct about a slowing economy, the dollar should fall and dollar-priced commodities should perform well. U.S. equities will fall and foreign equities will probably fall as well in response to less demand and a more competitive dollar…What’s the point of predictions if you can’t make money off of them? Heh-heh.
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GDP per se is a contrived government number. Take a look at tax receipts, rail freight traffic, electric power consumption, and entertainment sales. Rentals, dentists, and auto sales can feel a disturbance in the force is underway.
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+1
It’s lots more illustrative to look at harder to fudge (even assuming no ill intent) measures than GDP. Using an activity measure as a surrogate for economic well being, presupposes a whole host of assumptions to begin with. Virtually none of which are even remotely present anymore.
Median household total energy expenditure, while hardly some be-all, end-all measure, is at least somewhat anchored in the real world of limited resources and unlimited desires that economics sets out to describe.
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I still call for 1-2 % US GDP growth for Trumps term. 2-3% world growth. Slow growth is better than negative. However only the top 10% will benefit from this growth.
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