When 2015 rolled around, Wall Street's best weathermen, pardon, "economisseds" eagerly proclaimed that growth in 2015 in general, and Q1 and Q2 in particular would be superb, "above consensus" and on an "escape velocity" by which we mean a continuation of the Q3 GDP surge courtesy of Obamacare (they completely ignored the pervasive snowfall that was blanketing the Northeast around the same time, on which 3 months later they would blame why they were so very wrong).
Instead what happened yet again was another year of utter humiliation for said weathermen, pardon "economisseds" when Q1 GDP did, well, this.
In other words, a carbon copy replica of what happened last year. Well, not quite.
Unlike last year when every single weatherman, pardon "economissed", quickly declared the collapse in Q1 GDP from an initial consensus of 3% to an abysmal -2.5% was due to the weather, and not due to a dramatic tightening in Chinese end demand, this time there is suddenly no silver lining, and one after another, the economisseds are lining up to say that, ooops, they were all wrong.
We start with everyone's favorite permabullish economissed, Groundhog Phil's nemesis, Joe LaVorgna. His initial Q1 GDP was in the 3%+ range.It ended up being off by a few thousands percent. But what's truly scary is that even Wall Street's most amusing permabull can no longer see a silver lining in the current quarter.
Advance Q1 real GDP rose just +0.2% at an annualized rate compared to a +2.2% gain in the prior quarter, below the consensus +1.0% estimate. Inflation-adjusted consumer spending increased 1.9% compared to a 4.4% gain in the prior quarter. Final sales to private domestic purchasers, the best proxy for measuring underlying private demand, were up only 1.1% in the quarter, similar to the weather-impacted 1.0% gain in Q1 2014.
Additionally, there was a much larger inventory build ($110 billion) in Q1 than what we had expected—it added 74 basis points to Q1 real GDP. This was the largest inventory accumulation since the $116.2 billion build in Q3 2010. Given the fact the various regional purchasing manager surveys have been weak in April, it appears that producers will allow inventory positions to run off. This tells us that current-quarter growth is likely to run around 2.5%, not the 4% snapback we had previously been anticipating.
Are you feeling ok Joe?
But before you assume that Joe has finally figured it out, a deeper look reveals much Kool Aid still remains:
GDP growth is likely to be significantly stronger in the second half of the year (3%-plus), because the negative effects of the pullback in energy spending and the strengthening dollar will fade. This will keep the Fed on track to initiate interest rate normalization at the September FOMC meeting. Moreover, even with only a relatively modest snapback in growth expected this quarter, significantly reduced potential real GDP means that the labor market should continue to tighten.
We wouldn't expect any less. Still, even assuming 3% growth in both Q3 and Q4, which is highly unlikely unless the Fed too launches QE, then the highest possible 2015 GDP print is 2.2%, which would be tied for the lowest since 2011.
Are the recovery wheels suddenly coming off?
And just in case LaVorgna was not enough, here is permabull #2, BofA's Ethan Harris who just released a note titled "GDP: too weak to ignore" in which we read that he too, just slashed his Q2 forecast by more a third.
The economy only expanded by 0.2% in 1Q, coming in below consensus expectations of 1.0% and our forecast of 1.5% (Table 1). This is the exact same story as last year — the consensus was for low-1% and the first estimate of GDP was 0.2%. But last year, the data were subsequently revised even lower to -2.1%. And, it was easier to explain away the weakness from abnormally harsh winter weather and peculiar swings in a few of the components of growth. While there are “special factors” this year as well, including a port shutdown on the West Coast and poor weather in February, we are less comfortable dismissing these data.
There were two big shocks to hit the economy at the beginning of the year — the effect from the plunge in oil prices and rapid appreciation of the dollar — which are clearly serving as a bigger drag to growth and showing up earlier than we had expected. The strong dollar should remain a drag on growth in the coming quarters, but we expect the oil shock to turn neutral as consumer spends spend some of their savings from gas.
Uhm, Ethan, maybe hit F5 on the WTI chart buddy. If anything the ongoing surge in oil prices is about to slam a few nails in the US consumer's coffin. And just as they bought all those brand new and shiny gas-guzzling SUVs (using an Uncle Sam loan of course).
Considering these factors, we have revised down our forecast for 2Q GDP growth to 2.5% from 3.5% previously. We are holding with our forecast of 3.2% growth in 3Q and 4Q (Chart 1). However, for the year, growth is now averaging 2.4%, matching the pace last year. The long awaited pick-up in growth remains a forecast.
Good luck. We will revisit in a few months, just after the harsh spring showers make a mockery of this too economic forecast.