Atlanta Fed Slashes Q1 GDP Estimate To Only 0.1%

Tyler Durden's picture

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.

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.


* * *

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.


* * *

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?

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The Duke of New York A No.1's picture

But But But the June FED was supposed to be a live meeting!!!!!

Stox's picture

Doesn't matter.  Buy the dip

vote_libertarian_party's picture

Well that explains why stocks are near all time highs.



KnuckleDragger-X's picture

Just throw another layer of chrome on that turd, and everything will be shiny again, forever...YMMV.........

de3de8's picture

No way will ever say flat or negative regardless of real data

JamesNorman's picture

LOL.. At this point it is just too funny

SWRichmond's picture

Hey, it's positive, right?

pods's picture

It will stay positive until they know Q2 looks much better. Then they can go back and make it negative.  They have to keep from having two negative quarters in a row (recession).

Why, idk. I know many here have realized we have been in a depression for a long time now.


Winston Churchill's picture

Still way overstated.It was a disaster for small biz.

This quarter is picking up though

TradingIsLifeBrah's picture

The Rates Are Too Damn Low!  Rate Hike Summer 16

JamesNorman's picture

Run back into emerging technologies, it isn't rocket science

Kaiser Sousa's picture

BUY MORE STAWKS!!!!!!!!!!!!!

dmger14's picture

Obama's legacy - twice the debt and half the growth. #winning!

Secret Weapon's picture

If they would stop using bogus data they would have to admit  we are in a DEPRESSION.  Pathetic.

joego1's picture

Recession + indict Hitlary

John Law Lives's picture

It is time for a Triple Seasonal Adjusment (TM) to make the "data" look better.


vote_libertarian_party's picture

My wife doesn't get the disconnect.


Obamas happy talk and '5%' unemployment does not equate with Trump and Sanders angry crowds.


The wave of anger doesn't happen if the economy is mostly good.

undertow1141's picture

That's because there isn't 5% unemployment and by any measure before 2007 our economy is on its death bed. Anything under 2% before Obama would have had people running for cover. The angry are those who still see the threat to their prosperity.

skinwalker's picture

People can be wonderful, considerate, kind creatures. When the lights go out and there's no food on the table, those same people will turn into the most savage animals you will ever encounter. 


My greatest fear, post economic collapse, is not .gov and its minions, but rather an ordinary man with a gun and a starving child. 

Arthur Schopenhauer's picture

What's the Fed calling that "Meeting under Expedited Procedures" next Monday?

"Government in the Sunshine Meeting". Maybe they should change it to "Come to Jesus Meeting".

venturen's picture

negative rates, negative GDP = Record Stock Market    =======> Truly Einstein's theory of relativity! 

GoldenGoosed's picture

maybe we just need to look at the chart upside down; that fixes everything .... See!

Stick in the Mud's picture

With error band (needs to be reported!) GDP growth might be 0.1% plus or minus 1%, i.e. it could be a coin toss that we're contracting now. What will pull us out of this dive in Q2?

N0TaREALmerican's picture

"residual seasonals", gotta remember to use this one.

Scooby Doo's picture

But it is still a postitive number +.01%. We are stilllllllll growing.  /s

What a flipping joke!!

Colonel Klink's picture

My boycott of the eCONomy is working.  Everyone stop buying luxuries and consume the bare minimum.  Voting with your wallet is the only vote that truly counts!

redc1c4's picture

Wreckovery Summer 2016!!!!

Helluva j*b you;re doing, Present-Snit Obola!

ImmodestExtant's picture

Of course it's faulty seasonals, they are severely overestimating things because winter has been unusually warm.

brada1013567's picture

Put Liesman on it, quick.

ejmoosa's picture

This will just be another meeting where they look around the room, ask each other how they feel about their economies, and then conclude the rest of us have it all wrong.

It's a textbook example of groupthink, with imbeciles comprising the group.

RogerMud's picture

Atlanta Fed still has not gotten the memo.

scubapro's picture


dont like the number?  just change the stats or sample period...or just say "growth is due in the second half"