The GDPNow estimate at the Atlanta Fed has experienced a wild week. Let’s go through the changes so far. The estimate had been stable for a couple of weeks through the end of 2015 as there was no activity. We began the week with a fourth quarter estimate of 1.2%.
On Monday the ISM Manufacturing Index was released and it was dismal. When I go through the numbers remember this release was just for the month of December.
- The estimate on PCE Goods went from 3.0% to 2.5%
- The estimate on Fixed Investment went from -0.4% to -2.1%
- The estimate on Residential Investment went from +1.3% to -2.9%
Overall, the GDPNow estimate fell to 0.7%. This is a significant cut for a number that impacts only one of the three months in the quarter.
I heard exactly one reaction and it was flawed. On Tuesday the minutes from the December meeting of the Federal Reserve were released. This was the meeting where the Fed decided to raise rates. After the minutes, everyone was quick to note the vote to raise rates was barely in favor. The analyst I heard mentioned that if the Fed knew the GDPNow number would drop to 0.7%, it was likely they would have held off on raising rates.
I think that is incorrect. The Fed is responsible for stable prices and increasing employment. They are not responsible for growth of the economy. Growth in the economy has two precursors — productivity growth and population growth. With CPI or the PCE deflator well under 2% and employment continuing to increase, the Fed is achieving both targets and beginning to normalize rates is the correct response given their mandate.
Yesterday, figures on International Trade were released. This impacted GDPNow by raising the estimate of Q4 to 1.0%. While exports remained at 0.2%, imports went from 2.5% to 1.0% and since Net Exports is Exports minus Imports, the decrease in imports is a net positive for GDP.
Tomorrow is jobs day in the US as employment figures are released for December. This will not impact GDPNow. Later in the morning, figures on Wholesale Trade will be released and that will have an impact. Once we get those numbers, economic statistics affecting GDPNow will be absent for one week.
The current estimate from Blue Chip Forecasts that the Atlanta Fed uses is constructed by taking the top ten forecasts and the bottom ten forecasts. The range for Q4 is 1.5% to 2.6%. This is well above the GDPNow estimate of 1.0%. We are three weeks away from the official first estimate which leaves plenty of time for revisions. I hope to have time to follow this as it appears this might influence Fed actions. It shouldn’t, but if someone expects it to enough to make the comment publicly, there could be some interesting commentary for the January Fed meeting.