It is hard not to gloat when reading the latest embarrassing mea culpa from Bank of America's Ethan Harris, who incidentally came out with an "above consensus" forecast late last year, and has been crushed month after month as the hard data has lobbed off percentage from his irrationally exuberant growth forecast for every quarter, and now, the year. As a result, BofA has finally thrown in the towel, and tongue in cheekly admits it was wrong, as follows: "our tracking model now suggests growth of -1.9% in 1Q and 4.0% in 2Q for a first half average of just 1.0%.... Momentum is weak, but fundamentals are strong. We have lowered second half growth to 3.0% from 3.4%."
This happens just as Goldman's Jan Hatzius released only his second "above trend" forecast since December 2010 (that one was clearly wrong).
We give Goldman 2-3 months before it too admits it was irrationally optimistic on an economy which will likely grow well below 2% for the full year at a time when the Fed's is injecting less and less credit money into the economy, and in which bank lending - which is supposed to offset the tapering of Fed liquidity - is, as we reported earlier this week, plunging.
So how does Bank of America weasel its way out of being consistently wrong with its bullish (and this year was a super doozy) forecasts? Below we provide the funniest snippets which we are laughing out loud as we read and reread (highlights ours):
- Last fall, for the first time in this recovery, we shifted to an above-consensus forecast. With the weak recent data, we are pulling in our horns
- We now expect growth of just 3.0% in the second half of this year and peak growth of 3.2% growth during this minirecovery. We still believe there is room for a cyclical recovery, but it won’t have quite as much force.
- The US economy disappointed in the first half of the year (Table 2). When we published our year-ahead piece last November, we were expecting 2.75% GDP growth in the first half, but our tracking model now suggests growth of -1.9% in 1Q and 4.0% in 2Q for a first half average of just 1.0%.
- This is the third time in this recovery that annualized growth has dipped to just 1% or less over a two quarter period.
- It is hard to explain the weak growth at the start of the year.
- "Grossly distorted product" [but only when it is lower than our permabullish forecasts predicted]
- Consumer: weak wages; strong wealth
- What’s a forecaster to do?
Such confusion, many economists, very LOL:
Normally when there are distortions to a data release, economists “x out” the offending components and come up with a “core” story. However, first quarter GDP has so many x-factors that there is virtually no core. Consider the many moving parts: implementation of the Affordable Care Act, stronger utility spending surged due to the tough winter, government spending returned to normal after the 4Q shutdown (+0.5pp), collapsing inventory growth, and big trade swings. Weather also had a severe impact on many parts of the economy, causing some “demand destruction” (foregone activity that won’t come back) and some “demand deferral” (activity that will come back). Net it all out and the quarter still looks weak.
Oh wait, you mean you didn't anticipate all these "x-factors" when you predicted 2.75% first half growth? Gotcha.
The confused mea culpa continues:
What’s a forecaster to do? We fall back on several themes. First, although we can’t completely dismiss the weakness, it is worth noting that the extreme weakness in GDP is not matched by the 1Q annualized growth rates for other indicators. Payrolls rose 1.5% and aggregate hours rose 1.6%, numbers consistent with about 2 ½% GDP growth. Manufacturing output rose a modest 2.1%. The composite ISM index dipped to 52.9, just below its historic average of 53.6. Our own “global cycle” indicator for the US was just slightly below its historic average during the quarter, suggesting trend-like growth.
Second, we will be watching the “clean” post-spring data very closely. If December, January, and February were biased to the downside, then presumably, there is some temporary bounce back in March, April, and May. The data in May have been positive, on balance. Most indicators have been at or around consensus. One month does not make a trend, but this is a good kick-off for the summer.
But wait, there's more. Because it just gets better:
Housing: more cross currents
Home sales have been on a downward trajectory since June of last year, although recent data suggest a slight turn higher. Housing starts have essentially moved sideways with gains in multi-family building offsetting a soft trend in single-family building. Back in early May, we revised down our forecast for housing starts this year to 1.03 million from 1.1 million. We also trimmed our forecast for existing home sales and now look for sales to be down about 4% from last year.
We are still assuming that the second half of the year looks better than the first, and that starts average 1.25 million next year. Based on our new forecasts, we look for residential investment to be up about 2.0% this year, adding only 0.1pp to GDP growth.
Capital expenditures: all it needs is confidence
After a solid initial recovery, capital spending took a breather over the last two years. We believe this weakness reflected a loss of confidence in both the economy (after repeated soft patches) and in Washington (with repeated brinkmanship moments). Looking forward, we expect these headwinds to abate. Recent budget agreements take brinkmanship off the table for at least a year, if not all the way through the presidential election. Companies also seem a bit more confident about growth so a good couple quarters should spur some animal spirits.
Trade: unpredictable squalls
The trade data are always a wildcard, including in recent months. However, we expect trade to be an essentially neutral factor in growth over the next two years. Continued growth in domestic energy production should continue to constrain imports, but the rest of the trade balance will likely deteriorate modestly. The US still has a high propensity to import, and while our trading partners are growing faster than we are, the gap is not very large. For example, over the next year and a half we expect US GDP growth of about 3.1% and growth in the rest of the world of about 3.7%.
Stepping back, much of our discussion has focused on demand drivers, but the supply-side of the economy will determine how long this assumed mini-bounce in growth will last. Over time the Congressional Budget Office has been trimming its estimate of potential GDP. They now estimate potential growth of 1.7% and an output gap of about 4.5%. If that is correct, the economy would need to grow
3.5% over the next 10 quarters before the output gap closes.
All of this leaves our Fed call the same. Our growth and inflation forecasts are close to the FOMC central tendency. We have lowered our growth forecast and raised our inflation forecast, each by a couple tenths. Looking ahead, we expect the Fed to continue to counsel patience even as growth and inflation move higher. We expect the Fed to start seriously considering rate hikes next spring, but actually do the first hike in 4Q. We continue to expect very slow initial hikes, but a peak funds rate of over 4%.
Well Ethan, if this whole weather-forecasting thing, pardon, economastery for a bailed-out bank doesn't work out, you can always try your hand at comedy.