On April 8, the Atlanta Fed downgraded their Q1 GDP estimates for the second time in less than a week, and for the third time within the past 30 days. And this comes just as earnings season for Wall Street companies are about to begin next week.
Since beginning the year with an announcement that GDP growth for the first quarter of 2016 would be above 1%, and calling for growth as high as 2.6% as recently as February, the Atlanta Fed has changed course immensely since March 15 and has called for growth estimates of .7%, .4%, and now .1% respectively since that date.
For the third year in a row, forecasters came into the first quarter looking for 2%-plus GDP growth, only to steadily revise estimates lower. Chart 1 shows the Atlanta Fed’s GDPNow tracking for 1Q in each year. They are far from alone: both we and the consensus have been doing the same thing. This weakness adds to market skepticism about a June Fed hike.
In both 2014 and 2015 we faded the weak 1Q data and argued that the recovery remained on track. Today, we see four reasons to reiterate that call. First, outside of the GDP adding up, the data look fine. Second, some of the weakness is likely due to lingering seasonal adjustment problems. Third, the fundamental backdrop points to moderate growth, not a big slowdown. Fourth, and perhaps most important, with potential growth slipping below 2%, and given the normal variation in the data, we should not be surprised to see near-zero quarters on an annual basis.
At this time in both 2014 and 2015 a tremendous amount of ink was spilled trying to explain the 1Q collapse. On its third release, the official estimate of 1Q 2014 GDP fell to negative 2.9%. That is the weakest non-recession quarter in modern history. History almost repeated itself in 2015, with the 1Q number bottom at -0.7%, this time on its second release. After benchmark and other revisions, the 1Q numbers now stand at -0.9% and 0.6% respectively. Those are still very weak numbers. – Zerohedge
Most analysts on Wall Street are calling for extremely low earnings for Q1, and perhaps this is why companies have been purchasing their own stock back en masse to manipulate EPS numbers before heading into the summer slowdown. And with the Fed throwing in the towel on inflation estimates and future interest rate hikes, the bottom line is that the economy appears to fully be in a recession, and it no longer matters if the analysts continue to obfuscate the data to promote their goldilocks propaganda.
With all economic numbers and reported data, traders and investors have to assume that government reports are modified upwards of at least a full percent through the spurious use of seasonal (and in the case of the U.S. government), or doubly seasonal adjustments to make the environment look better than it actually is. But when a Federal Reserve regional bank drops their GDP estimates faster than gamblers can pump coins into a slot machine, the writing is on the wall that this quarter’s growth in the economy is most probably signalling recession.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.com,Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.