Yesterday, JPM's Michael Feroli who is now undisputedly the least worst Wall Street economist (RIP Hatzius) cut his 2012 GDP forecast to under 1% net of fiscal adjustments. As of minutes ago, he just slashed his Q3 GDP from 2.5% to 1.5%. And the worst news for Obama: he will be dealing with 8.9% unemployment during his re-election campaign, which can now Rest in Peace. Speaking of RIPs, here's to you growth Hockeystick. You will be fondly forgotten.
For some time now we have been highlighting downside risks to our already below-consensus growth forecasts. Given some recent developments, we feel compelled to lower our projection for GDP over the next four quarters.
For the current quarter the GDP arithmetic isn't setting up well, particularly regarding the outlook for an strong quarter on consumption, which now looks like it will have a tough time advancing at more than a 2% annual rate this quarter. In addition, early survey measures suggest activity may have stalled amid the debt ceiling rancor. Because of this we are lowering our Q3 GDP forecast from 2.5% to 1.5%. We do foresee some acceleration in Q4 to 2.5% (previously 3.0%). However, due to the anticipated drag from higher taxes and lower federal outlays early next year, we are reducing first half 2012 GDP growth by 1/2%-point to 2%. We had previously partly discounted some fiscal drag in our forecast for early next year, though left in some chance that we could see an extension of fiscal support. Those chances seem to be diminishing and it now looks more likely that growth could hit a pothole early next year. The revised forecast implies very little improvement in the unemployment rate, and doesn't see a fall below 9% in the coming year. We will have further details on the reasoning behind our forecast change in a note in this week's GDW.
Our previous Fed call had looked for the first increase in overnight policy rates at the beginning of 2013. Given that our forecast now has little improvement in the output gap until the second half of next year, we are pushing back that call until mid-2013. In the meantime we believe the Fed will undertake further measures to deliver monetary stimulus to the economy, even though those measures might not be particularly powerful. We will send out a note later this week regarding our expectations for next week's meeting: we don't see more asset purchases forthcoming but we do think the Committee will take incremental steps to signal increasingly accommodative policy.