Three days ago we revealed what we dubbed a "GDP Shocker: Atlanta Fed Calculates Q1 Growth Of Only 1.2% [6]", which as we clarified the next day showing the spreadsheet [7] used by the Fed, is based almost entirely but not exclusively on the collapse in energy capex and its resultant adverse impact on non-residential construction (in addition to a drop in consumption and trade). We said that not only is this entirely reminiscent of the GDP collapse in Q1 of last year, but that it was only a matter of time before the sellside picked up on this huge divergence and proceeded to slash their own GDP numbers.
Well, in the aftermath of today's super-strong (supposedly) jobs number, one would think that the sllside would be rushing to hike their GDP estimates, right.
Wrong. Because moments ago, JPM's Michael Feroli released a note which confirmed we were right on both counts: not only did Wall Street just now realize how far behind the real-time curve it is, but that - just as we cautioned - Q1 of 2014 is back, precisely one year later.
Quote JPM:
Revising down Q1 GDP (here we go again?)
In light of the data we've received this week – January reports for real consumer spending, construction spending, and net exports that varied from disappointing to downright weak, as well as a softer February print for car sales –-- we are marking down our tracking for annualized real GDP growth in Q1 from 2.5% to 2.0%. Even after this revision risks are more skewed to the downside than upside.
And what Zero Hedge readers knew three days ago, JPM's paying clients are finally catching up to, i.e., where the Atlanta Fed is seeing Q1 GDP as of this moment, and that it is very likely that GDP will catch down to it rather than to the previous consensus estimate in the mid-2% range. To wit:
By way of comparison, the Atlanta Fed's tracking estimate of Q1 recently came down to 1.2%. It's still relatively early in the quarterly data flow, even so, it is feeling eerily like Q1 of last year. In both cases the quarter began with high expectations, estimates were brought down as the quarter progressed, weather was blamed, but most forecasts remained upbeat on the medium-term outlook. The calm that generally prevailed last year proved correct, as the economy quickly bounced back from the -2.1% print for 14Q1.
For those who forgot, this is what we showed on Tuesday [6]:
[8]
The rest of the note is self-explanatory for anyone who can actually think independently and away from the penguin crowd of conformist, yet utterly hollow, chatterboxes:
Looking back it seems a few lessons are relevant for thinking about the economy today. First, parsing out the noisy components of GDP can deliver a better read on the trend in the economy. We advocate private domestic demand as a useful "core GDP" measure. It's not that government, foreign trade, and inventories don't matter, it's just that they can impart a lot of quarterly volatility to GDP. Currently, private domestic demand is tracking around mid-2's for Q1, not great but not terrible either. Similarly, in 14Q1 private domestic demand increased at a 1.0% pace, three percentage points better than the headline GDP print.
Second, production-side indicators of the economy – particularly job growth – can give a useful check on the more familiar spending-side data used to estimate GDP. This may partly reflect the fact that Gross Domestic Income – partly estimated using payrolls data – is a good check on GDP. But it may also be the case that hiring partly reflects business expectations, and so should be smoother than output. In any case, payrolls averaged an above-trend 207,000 per month in Q1 of last year, and so far are averaging 267,000 per month in Q1 of this year.
Lastly, expect the Fed to weight the jobs data more than the expenditure data. Of course better GDP growth would hasten the path to normalization, but if jobs and GDP conflict, expect the Fed to hew to the mandate, which relates to employment. In Q1 of last year the Fed steadily tapered at a $10 billion per meeting pace. This occurred even though the Fed insisted that tapering was data dependent (which is a story for another day). At any rate, we think that currently the Fed will remain more focused on the improvement in the job market than the disappointment in GDP.
Yes, yes, one should perhaps also include AAPL and the seasonally-adjusted ISM sentiment surveys in one's definition of GDP (as well as hookers and blows as Europe has done) any time underlying reality does not conform with one's wrong model.
The problem for JPM and everyone else is that now that the jobs numbers have been absolutely bombastic (if completely goalseeked and seasonally adjusted beyond any relevance, completely failing to account for the plunge in energy sector jobs) Wall Street will no longer be able to blame the weather on the immiennt GDP collapse. That bridge has been burned.
As for the late year rebound in 2014 GDP, as we have explained countless times, it was all on the back of Obamacare and the surge in healthcare spending [9], as well as the not one but two downward revisions to the US savings rate [10], which on paper, and only on paper, led to a boost in consumer spending. A savings rate which is now rising rapidly higher and denying all the permabulls their hoped for spending spree as a result of lower gas prices. Gas prices, which incidentally are now rising, so the sweet spot for any realistic boost to spending has now passed.
Which means that as we get closer to that preliminary Q1 GDP announcement in two months, watch as the narrative collapses, when on one hand there are massaged job numbers, even if unaccompanied by actual wage increases, boosting the case for a rate hike, while the underlying economy once again grinds to sub-stall speed.
