After today's latest atrocious wholesale inventory and sales data, we predicted that this may be the straw that tips Q1 GDP into contraction, or at best keeps it unchanged, per the Atlanta Fed.
Atlanta Fed should be at 0.0% for Q1 GDP after this
— zerohedge (@zerohedge) April 8, 2016
We were wrong. Moments ago the Fed with the highly-tracked GDP estimator, slashed its Q1 GDP estimate... to 0.1%. As a reminder, this number was as high as 2.7% precisely two months ago.
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 0.1 percent on April 8, down from 0.4 percent on April 5. After this morning's wholesale trade report from the U.S. Bureau of the Census, the forecast for the contribution of inventory investment to first-quarter real GDP growth fell from –0.4 percentage points to –0.7 percentage points.
So should you panic? No, says BofA economist Ethan Harris. It's all due to, drumroll, "faulty seasonals" the same fault seasonals that prompted the BEA to introduce a second seasonal adjustment last quarter to account for precisely that!
For the third year in a row, forecasters came into the first quarter looking for 2%-plus GDP growth, only to steadily revise estimates lower. Chart 1 shows the Atlanta Fed’s GDPNow tracking for 1Q in each year. They are far from alone: both we and the consensus have been doing the same thing. This weakness adds to market skepticism about a June Fed hike.
In both 2014 and 2015 we faded the weak 1Q data and argued that the recovery remained on track. Today, we see four reasons to reiterate that call. First, outside of the GDP adding up, the data look fine. Second, some of the weakness is likely due to lingering seasonal adjustment problems. Third, the fundamental backdrop points to moderate growth, not a big slowdown. Fourth, and perhaps most important, with potential growth slipping below 2%, and given the normal variation in the data, we should not be surprised to see near-zero quarters on an annual basis.
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At this time in both 2014 and 2015 a tremendous amount of ink was spilled trying to explain the 1Q collapse. On its third release, the official estimate of 1Q 2014 GDP fell to negative 2.9%. That is the weakest nonrecession quarter in modern history. History almost repeated itself in 2015, with the 1Q number bottom at -0.7%, this time on its second release. After benchmark and other revisions, the 1Q numbers now stand at -0.9% and 0.6% respectively. Those are still very weak numbers.
Two seasonal adjustment stories were in play in both years. First, these were unusually harsh winters, although in 2015 February was the only truly nasty month. Our own work and reading of the literature suggested that bad weather had a big impact on certain sectors (such as housing) and on the hard hit regions, but it is hard to show a compelling impact on overall GDP. Bad weather seems to cause delays and shifts in spending—for example, utility spending rises while other activity dips—with limited sustained impact overall. Note, that 2Q GDP rebounded by 4.6% in 2014 and 3.9% in 2015.
A bigger issue appears to be “residual seasonality” in the first quarter. Recall that on a nonseasonally adjusted basis, the economy has a one-quarter “recession” at the start of every year. Consumption plunges after the holiday season and housing and other activities freeze up. While up-to-date data are not available, seasonal effects push down GDP at about a 15% annual rate for the quarter. This makes measuring the quarter extremely difficult. Adding to the challenge, many of the more obscure indicators that go into GDP are not seasonally adjusted either because there is not adequate history or the data are erratic and don’t meet the “statistical significance” required for seasonal adjustment.
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Perhaps the biggest story here is simply that with low trend growth, near-zero quarters are more frequent. By our estimate, potential GDP growth has fallen in half—from 3.5% in the 1990s to 1.7% currently. The volatility around that trend remains roughly the same (Chart 6). The standard deviation of GDP growth was 2.0% in the 1990s expansion and is 1.6% in the current expansion (Table 1). Nonetheless, sub-1% quarters now happen almost every year. Get used to it.
Oddly enough, while "residual seasonals" may justify why Ethan Harris has been so wrong on numerous occasions with this forecast, it does not explain why in a separate report, the very same BofA found that retail sales in March continue to struggle as the rebound for the US consumer, responsible for 70% of the US economy, is nowhere to be found!
No comment on that Ethan? Or maybe on this: if it is "faulty seasonals" to blame... for the third year in a row... were you unaware of them when you made your initial 2.5% Q1 GDP estimate?