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Q1 GDP Preview

Tyler Durden's picture


In just about an hour, the first (of three) Q1 GDP numbers will be released. It is expected to rebound to 3% from 0.4% in Q4. As Goldman explains, the bounce is expected to reflect "a mix of temporary factors -- namely a large inventory boost contributing about 1pp to growth -- and a genuine upside surprise from the strength of consumer spending despite the 2013 tax hikes." However, as we have since seen, the consumer "spending" was largely a seasonal revision of unadjusted data, which hardly was as euphoric, and which has sharply rolled over in Q2, meaning that what consumers add to Q1 GDP will be promptly removed from the second quarter. Furthermore, since there are two more GDP revisions, and since the Fed will likely seek to moderate QE "tapering" expectations, it wouldn't be surprising for GDP to come substantially weaker than expected, only to be revised higher (or lower) subsequently. In either case, for those who still believe macroeconomic fundamental data is relevant (in the New Normal it isn't), here is a quick run through what to expect from GS.

* * *

GDP Preview, From Goldman Sachs

  • Friday's first-quarter GDP report is likely to look strong on the surface, with real GDP growth of about 3.2% surpassing consensus expectations and PCE inflation well below the FOMC's target at around 1.2%. The strong Q1 growth rate reflects a mix of temporary factors -- namely a large inventory boost contributing about 1pp to growth -- and a genuine upside surprise from the strength of consumer spending despite the 2013 tax hikes.
  • Despite the strong Q1, we expect growth to slow in Q2 as the boost from temporary factors fades and the drag from the sequester hits. We forecast GDP growth of 2.0% (annualized) in Q2 and Q3 and 2.5% in Q4. A downside risk to our forecast is consumer spending, which showed signs in March of a delayed impact of the tax increases.
  • GDP has historically been one of the economic releases with the largest impact on bond and equity markets. However, since the start of the crisis most economic data have had a much larger market impact, while the effect of GDP surprises has faded. This could reflect both the growing popularity of alternative measures of aggregate economic activity and increasing attention to earlier releases that contain much of the data in the GDP report.

The first-quarter GDP report (to be released on Friday at 8:30am) is likely to show strong growth at a higher-than-consensus rate of about 3.2% and subdued headline and core PCE inflation of about 1.2%, in line with expectations and well below the FOMC's 2% target.

The strong first quarter reflects a mix of temporary factors and genuine upside surprises relative to expectations at the start of the quarter. The most important temporary contribution will come from inventories, which we estimate contributed about 1pp to growth in Q1 after a very weak 2012Q4. The largest upside surprise is consumer spending, which we estimate contributed about 1.8pp despite the 2013 tax hikes.

Exhibit 1 shows our estimates in detail. Residential investment continued to be the strongest sector in Q1 and we expect growth to continue at a rate of about 15% for the remainder of the year. Business investment slowed in Q1 after a very strong 2012Q4, but we expect strong growth to resume for the rest of the year and through 2014. Finally, while federal government spending was not a major drag on growth in Q1, it will be a large drag on growth for the rest of the year.

Exhibit 1: Breakdown of our First Quarter GDP Estimates

Despite the strong Q1, we forecast GDP growth of 2.0% (annualized) in Q2 and Q3 and 2.5% in Q4. This slowdown reflects both the fading of temporary boosts in Q1 and the impact of the sequester. A downside risk to our forecast is consumer spending, which we noted has recently shown signs of long-anticipated weakness. We currently expect spending to increase 2.0% (annualized) for each of the next three quarters, but a delayed impact from the tax hikes could push the growth rate of consumption down to the 1-2% range.

Much of the information contained in the GDP report is released in other, earlier reports. This might lead one to think that the GDP report has relatively little market impact because it contains only a modest amount of new information and is reported with a long lag. However, in previous research we found that a 1 standard deviation GDP surprise -- defined as the difference between the actual reported value and the Bloomberg consensus -- historically had the second largest impact on both equities and 10-year Treasuries of any data release over the period since 2003, led only by payrolls. Exhibit 2 compares the impact of surprises to GDP and other leading economic data releases. We again estimate the market impact of a surprise by measuring price changes during a 20-minute window surrounding the data release. While non-farm payrolls leads all other indicators by a considerable margin, the GDP report is second, ahead of other indicators that are released with much shorter lags. The chart suggests that a 1 standard deviation positive GDP surprise is associated with a roughly 2 basis point increase in 10-year Treasury yields and a 0.25% increase in S&P 500 futures.

Exhibit 2: GDP Has Been Among the Indicators with the Largest Market Impact

Recently, however, the relative market importance of GDP seems to have declined. Exhibit 3 compares the market impact of GDP with an average of five other economic releases that have a very large market impact, non-farm payrolls, the ISM manufacturing survey, the household employment report, the ADP jobs report, and retail sales. We compare the estimated impact during two five-year periods, 2003-2008 and 2008-2013. As we have noted before, the market response to most macroeconomic data has grown much stronger since the crisis, shown by the large increase in the estimated average impact of the group of top indicators. In contrast, the impact of GDP on equities has declined modestly. We also find a much starker change in the impact on bond yields, with the effect of a 1 standard deviation surprise falling from roughly 3bp to nearly zero.

Exhibit 3: Recently, the Market Impact of GDP Has Fallen

We see two potential explanations for the declining market impact of the GDP report. First, market participants have begun to pay more attention to alternative measures of aggregate economic activity, such as our Current Activity Indicator. Alternative measures have the advantages of being available in real time -- much more quickly than the GDP report -- and in some cases might be better at capturing momentum. Second, increased attention to the earlier reports that contain much of the information eventually included in the GDP report might have reduced its influence over time.

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Fri, 04/26/2013 - 07:39 | 3501650 valley chick
valley chick's picture


Fri, 04/26/2013 - 07:44 | 3501657 Bearwagon
Bearwagon's picture

Bullshittish! Remember it's friday!

Fri, 04/26/2013 - 08:01 | 3501680 GetZeeGold
GetZeeGold's picture



Hey...it is Friday. Where's my methadone laced Koolaid?

Fri, 04/26/2013 - 08:02 | 3501692 Bearwagon
Bearwagon's picture

Ask the crackheads at the choomroom.

Fri, 04/26/2013 - 08:06 | 3501695 Sudden Debt
Sudden Debt's picture






Fri, 04/26/2013 - 08:10 | 3501713 max2205
max2205's picture

How would you like your GDP number cooked sir.  Well done?, very good sir.

Fri, 04/26/2013 - 07:40 | 3501652 Jayda1850
Jayda1850's picture

I got up 1.6%, with the sequester and weather being blamed of course.

Fri, 04/26/2013 - 07:43 | 3501656 Everybodys All ...
Everybodys All American's picture


Fri, 04/26/2013 - 08:13 | 3501716 IamtheREALmario
IamtheREALmario's picture

Yes. How does the $500 billion in "intangibles" effect the number and how does it compare to Q4 2012 without the intangibles?

Fri, 04/26/2013 - 07:48 | 3501664 Jason T
Jason T's picture

we know aggregate hours worked went up 1.4% in Q1 year over year.. all depends on productivity... I have low expectations for Q1 GDP and more so for Q2

Fri, 04/26/2013 - 07:51 | 3501668 Cdad
Cdad's picture

So yer callin' the top this mornin' then...

Fri, 04/26/2013 - 08:03 | 3501693 Jason T
Jason T's picture


Fri, 04/26/2013 - 08:21 | 3501733 spankthebernank
spankthebernank's picture

3.5-3.7  They can't risk losing the great power of the wealth effect.

Fri, 04/26/2013 - 07:54 | 3501671 Misean
Misean's picture


Isn't Goddam Sucks....Goldman Sux....erm..whatever...on the list of "accidental early receivers" of such data?

Why bother with this "our best guest" charade? Or is this a head fake?

Fri, 04/26/2013 - 07:58 | 3501679 Bearwagon
Bearwagon's picture

Whatever Sacksman Gold receives up-front - it's never accidental. That much I know for sure.

Fri, 04/26/2013 - 08:21 | 3501734 edb5s
edb5s's picture

"[...]and a genuine upside surprise from the strength of consumer spending despite the 2013 tax hikes."  So, they are banking on a surprise?  Does this make sense to anyone?  Oh wait...I almost forgot that they get these data earlier than the rest of us.  Carry on...

Fri, 04/26/2013 - 07:55 | 3501673 Wm the Shrubber
Wm the Shrubber's picture

There is a $3.5BN POMO today which should nicely polish whatever economic turd crosses the threshold!

Fri, 04/26/2013 - 08:00 | 3501678 ThunderingTurd
ThunderingTurd's picture

What are the chances Ben was giving the market a heads up regarding a poor GDP number yesterday discussing "the stresses that still remain in the system"?

Fri, 04/26/2013 - 08:01 | 3501681 Awakened Sheeple
Awakened Sheeple's picture

Whatever the number, We'll all end the day saying, "wtf."

Fri, 04/26/2013 - 08:05 | 3501699 Bearwagon
Bearwagon's picture

Most definitely not! I will end the day saying: "Here's to stinkin' rich! Yea! Stinkin' rich!"

Fri, 04/26/2013 - 08:18 | 3501722 GetZeeGold
GetZeeGold's picture



Soooo......you're the one that raided the JPMorgan gold vault.


That post is still clinging to the top spot.....almost defying gravity.

Fri, 04/26/2013 - 08:25 | 3501753 Awakened Sheeple
Awakened Sheeple's picture

Sort of like the S&P.

Fri, 04/26/2013 - 08:30 | 3501772 GetZeeGold
GetZeeGold's picture



DOW 15000.....you just have to believe.

Fri, 04/26/2013 - 08:55 | 3501869 disabledvet
disabledvet's picture

When that's all that's left sure "belief it is." methinks one explanation for the truly amazing rally this Spring was the expectation of the negative print last December being a "one off." if gold and silver start rolling over here then obviously "that's another word for liquidity drying up." does not necessarily mean a recession...but it can sure feel like one. "why am I reaching for yield when gold and silver are falling" again? I should be reaching for principle no?

Fri, 04/26/2013 - 09:03 | 3501907 GetZeeGold
GetZeeGold's picture



Cut him some slack.....he's been in a coma the last few daze.

Fri, 04/26/2013 - 08:09 | 3501710 Marley
Marley's picture


"Being against big government that oppresses rights of the people, that openly participates in crony capitalism, that manipulates markets, interest rates, money supply and on and on is not the same as being anti-governement."

Ok, then run more stories like this!

Fri, 04/26/2013 - 09:57 | 3502150 gonetogalt
gonetogalt's picture

I call bullshit. Bet you an ASE the plant was built in the middle of nowhere and the idiots built the town around the plant. And volunteer fire departments are just fine, generally well trained, and don't cost a fortune to maintain.

Fri, 04/26/2013 - 08:31 | 3501779 youngman
youngman's picture

2.5%....is the number

Fri, 04/26/2013 - 08:36 | 3501785 SheepDog-One
SheepDog-One's picture

It's Friday today? Wow I must be drinking way too much 3.2% beer.

Fri, 04/26/2013 - 08:40 | 3501794 youngman
youngman's picture

I will be soon....too....Aquilla cerveca....es el mejor

Fri, 04/26/2013 - 08:45 | 3501814 stant
stant's picture

2.5 sucks. better double down on the terror attacks. before the next time to have something to blame it on

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