When Bullish Myths Of US Growth Implode, Simply Hit The "Reset" Button As SocGen Just Did
Not only would SocGen be shocked if the Fed made any significant policy shift this week, they appear to be finding "belief" in a growth renaissance hard to sustain in light of the dismal reality that keeps getting in the way of 'faith'. Undertaking any policy shifts at this meeting would be akin to driving at night with no headlights, they note, taking the opportunity to slash Q3 and Q4 GDP expectations - pushing off hope for any Taper announcement until late Q1 at its earliest. Of course, they remain "fundamentally bullish" on US growth (or every assumption about the world would implode) but the mid-year inflection point they hoped for appears to be further into the future than they hoped.
We expect no material changes in the FOMC statement this week, with odds of the Fed either increasing or decreasing the pace of purchases very close to zero. The economy is currently going through a period of uncertainty following the government shutdown, and has yet to digest fully the impact of higher rates. Therefore, we expect the Fed to take this opportunity to take stock of recent events, but opt to wait for more clarity before making any policy adjustments. We are also taking this opportunity to update our own economic forecasts. By our estimates, Q3 GDP is currently tracking at 2.3%, marginally lower than our published forecast of 3.0%. We are also downgrading our Q4 projection from 3.6% to 3.0% to account for the negative effects of the government shutdown. This would put the full- year growth rate at 2.2% on Q4/Q4 basis. We continue to look for a meaningful acceleration next year to 3.2%. We believe that these forecasts are consistent with a tapering announcement in late Q1.
Undertaking any policy shifts at this meeting would be akin to driving at night with no headlights. Since the September FOMC meeting, visibility on the outlook has not improved at all and, if anything, has gotten worse. The Fed’s concerns about fiscal policy have materialized, though the impact on growth remains uncertain. And, although financial conditions are easing again (see chart below), the net effect is still one of reduced visibility.
In this context, it would be far more prudent to wait for more clarity on the economic outlook. This is precisely what we expect the FOMC to do, not just this week, but also at the December meeting. In the meantime, the Fed will likely use the next two meetings as an opportunity to take stock of recent events and evaluate their impact on the economy.
Hitting a reset button on our economic forecasts
We also take the opportunity to update our GDP projections to account for recent events. Data available to date suggests that the economy clocked in a 2.3% annualized growth rate in Q3, i.e. marginally lower than our published forecast of 3%. The chart below shows a breakdown of contributions to growth by sector. While nearly every sector of the economy has shown some deceleration vs. Q2, consumer demand is the major reason for our revision, with real consumption now assumed to have grown at just 1.5% (today’s retail sales will be the next key data input into this estimate). We are also revising down our Q4 forecast from 3.6% to 3.0% to account for the effects of the government shutdown and for the slightly weaker momentum coming out of Q3.
We remain fundamentally bullish on the US growth. Since the start of the year, we have been calling for an inflection point around mid-year as the last of the headwinds began to dissipate. While the government shutdown has prolonged the period of fiscal uncertainty, the reality remains that new austerity – above and beyond what was legislated at the start of this year – is quite unlikely. Policy uncertainty is also on a downtrend, notwithstanding recent spike. And, housing should continue to be supported by declining real mortgage rates.
So in summary, our bullish hope based forecasts missed by a mile, so we are taking a hatchet to them, time-shifting them, and hope that we will be right again at some point in the future...
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