Stone McCarthy On The GDP Print: "The FOMC's Growth Forecast Now Appears A Bit Optimistic"
Before we move on from today's atrocious GDP number, we are presenting the one firm whose macroeconomic opinion we truly respect: Stone McCarthy, and yes we will make an exception for Goldman's comments because we are delighted to recall how Jan Hatzius predicted a new golden age for the US economy as recently as December 1 (read at: "Goldman Jumps Shark, "Fundamentally" Shifts Its "Bearish" Outlook On Economy: Goes Bullish, Hikes Outlook"). Because every documented incident of failed "shark jumping" deserves the proper amount of gloating.
But back to SMRA:
1) Headline GDP--Unrevised at +1.8%, But Important Compositional Revisions
2) Surprising Downward Revision to PCE, Points to Weaker Aggregate Demand
3) Upward Revision to Inventories Points to Lower Inventory Building Ahead
4) Net GDP Revision Points to a Slower Trajectory of Growth than Apparent Earlier
The Second Estimate of Q1-11 GDP revealed a 1.8% rate of gain unchanged from the 1.8% per the Advance release. While the headline Q1 GDP rate of change was unchanged from the Advance estimate there were important compositional revisions, which in combination point to a slower trajectory of growth than appears to be on track prior to this rlease. In other words, we are a bit disappointed with these data.
Guess who is most embarassed by this data. Hint: not Goldman.
For all of 2011 the FOMC anticipates growth of 3.1% to 3.3%, implying a growth rate of around 3-1/2% to 3-3/4% over the balance of the year. This now appears to be a bit optimistic. It now appears as if Q2-11 may post a gain of about 3%. For the FOMC's forecast to be realized we would need 4% growth in the second half.
A few days ago we predicted Consumer Discretionary will soon be one of the weakest sectors on a relative performance basis. This GDP report confirms it.
The most disappointing downward revision was PCE, which was revised to +2.2% from +2.7% per the Advance release. The downward revision was spread across Durables, Nondurables, and Services.
The downward PCE revision subtracted 0.38%. In other words, the revised PCE contribution was +1.53% down from +1.91% per the Advance release
On the surface the weaker PCE contribution brings into question the momentum of consumer spending. Could the Q1 data be signalling a slower trajectory of this core GDP component?
Offsetting the downward revision to PCE was an upward revision to Q1 Inventories. Inventories made a Q1 contribution to GDP of 1.19%, up from 0.93% per the Advance release, providing a 0.28% positive contribution to the GDP revision.
The stronger Q1 inventory story could actually be at the expense of coming quarters. The added contribution to Q1 GDP will probably be at the expense of Q2 GDP.
Net-Net, the composition of the revised Q1 GDP data is disappointing. The momentum of consumer spending looks weaker, and the need to build inventories appears diminished. This is a prescription for slower GDP growth than earlier appeared on track.
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