Investors monitoring the Atlanta Federal Reserve’s GDPNow near real-time, and now falling, economic barometer may find themselves shouting, fruitlessly, “SerenityNow!” at their screens.
Updated frequently, GDPNow’s reading on US second-quarter growth slipped to just 0.7% Friday, downgraded from 0.8% in the wake of weak retail sales data. That’s about two percentage points below the consensus among economists, and taken in conjunction with the tiny 0.2% growth rate in the first quarter, may call into question expectations for the rest of the year and the path of Fed policy.
The proprietary measure, which the Atlanta Fed calls a “nowcast,” churns up data and spits out a forecast which, at least lately, has put its human competitors to shame. While Wall Street had the first quarter pegged at a 1.0% growth clip, GDPNow was on target with a fractionally too gloomy 0.1% forecast.
This, in combination with a recent run of ropey, though not outright downbeat, data, has occasioned a certain amount of downward forecast revisions and rekindled talk about secular stagnation and, once the revisions are in, at least one quarter of outright contraction. There is also a hot debate over whether the first quarter’s poor showing can be explained away by disruptive wintry weather or by faulty seasonal adjustments which will only later be revised away.
The good news: it may not be that bad. In fact, as in recent years, the poor first few months of the year, particularly the way in which weather and a West Coast port slowdown affected things, may be setting us up for a reasonable rebound.
The Fed itself has taken both sides of the argument in recent days. San Francisco Fed economists writing this week found the data as seasonally adjusted by the Bureau of Economic Analysis does fluctuate on a calendar basis, called residual seasonality.
“After we apply a second round of seasonal adjustment directly to the published aggregate data, we estimate much faster real GDP growth in the first quarter of this year. We conclude that there is a good chance that underlying economic growth so far this year was substantially stronger than reported,” Glenn D. Rudebusch, Daniel Wilson, and Tim Mahedy write.
Two sides of every bet
Federal Reserve Board economists seem to be taking the other side of that bet, saying on Friday they could find “no firm evidence” that the first quarter was driven by residual seasonality, though owning that the pattern of a rebound may hold.
Steven Englander, currency strategist at Citigroup, argues, interestingly, that the ballooning of the US trade deficit, which has caused many to mark down their estimates of final revisions to first-quarter growth, may actually be setting the stage for a recovery. Driven by a record increase in imports, the trade deficit in March hit US$51.4 billion, the biggest figure in six years.
“One of the strongest regularities in the GDP accounts over the last 40 years is that a shock to net exports leads to a bigger shock in the opposite direction in the following quarter,” Englander writes in a note to clients.
In other words, though counterintuitive, a fall in net exports often presages a subsequent rise, and with it a recovery in output.
While imports are subtracted out of GDP, the way the global supply chain works may mean that today’s imports, or at least a substantial part of them, will be tomorrow’s domestic output.
Englander takes the example of a car ignition system which is made overseas and must be imported before the car can be assembled and sold. Today’s uptick in car ignition imports is tomorrow’s uptick in sales.
Similarly when you buy a Chinese-made stuffed animal from an online retailer, they very likely are importing the good, but adding value, for example by marketing online, domestically. The import leads to domestic activity, but with a lag, as the marketing and shipping take place onshore after the teddy bear lands in Long Beach.
If, in fact, things are not so bad as GDPNow indicates, the impact on markets will be mixed. The dollar would clearly be a beneficiary, but the outlook for financial assets will be complex.
To the extent that a better-than-anticipated rebound forces the Federal Reserve to take a more hawkish stance, or to raise interest rates sooner than expected, things may get hairy.
Not only will that hurt bonds, but very likely stocks as well.
Serenity now, or serenity tomorrow, may be hard to find.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)
