Based on the Federal Reserve Bank of Atlanta’s latest economic forecast, the US economy is moving from red hot to boiling – a worrying development for the Federal Reserve and anyone else hoping interest rates won’t rise.
But fear not: The Atlanta Fed’s GDPNow model estimate of real GDP growth for the third quarter, which was revised up to 5.8% on Wednesday from 5.0% the previous week, is not an official forecast. It’s not even forward-looking, but is based on “available economic data for the quarter currently being measured.” And it’s likely to be revised down — maybe much lower — during the third quarter.
Perhaps the band Guns N’ Roses put it best: “All we need is just a little patience.”
The latest reading followed the release of data on July housing starts, which rose 6.7% month-on-month, and reports that industrial production rose sharply last month. In particular, the good real estate data drove the GDPNow revision as the contribution of residential investment to the model increased from -0.2% to +0.42%.
On the surface, the latest GDPNow reading appears to be bad news for the Fed, which has been attempting to cool the economy by aggressively raising interest rates to lower inflation. The current target range for the federal funds rate is 5.25% to 5.5%, the highest level in 22 years.
Advertisements – Scroll to continue
“The latest third-quarter GDP estimates, coupled with new retail sales data, suggest a much more resilient fundamental to the economy, which is certainly not what the Fed wants to see as it travels the so-called ‘last mile’ to achieve of price stability.” Quincy Krosby, chief global strategist at LPL Financial, recently wrote.
If the current GDPNow rate holds — the seasonally adjusted annualized rate was just 4.1% two weeks ago — it would be the fastest growth rate since 2003, says Schwab’s chief investment strategist Liz Ann Sonders.
But the chance of it holding up is slim.
Advertisements – Scroll to continue
The GDPNow model is based solely on previously published data, Mike Skordeles, head of US economics at Truist Advisory Services, told Barron’s. All July data has not yet been released, let alone economic data for August and September.
“When that data comes in — as we’ve seen with some of these numbers, particularly housing starts and production over the past few days — that’s driving that forward [GDP] “There are many,” says Skordeles. “This is especially true at the beginning of the quarter as there is no other monthly data for the third quarter yet.”
There is also a good chance that at least some of the July data releases feeding into GDPNow will be revised down. The Bureau of Labor Statistics, for example, revised down sharply wage growth for May and June and may revise July jobs when it releases August data.
Advertisements – Scroll to continue
While the GDPNow model reflects the strength of July data for retail sales, auto sales, housing starts and industrial production, Skordeles says most of that resilience was more “one off” and didn’t reflect an enduring trend. The strength forecast in the July reports was also bolstered by double counting of some items, notably auto and home construction data, which appear in multiple agency reports.
While new home construction surged in July, new building permits — widely regarded as a leading indicator — are currently not factored into the GDPNow estimate, Skordeles notes. Approvals are 13% below 2022 levels. In addition, July housing data does not yet reflect the mortgage-related fallout from the recent rate hike. Average mortgage rates for 30-year mortgages rose to all-time highs last week. Given these factors, overall housing construction looks weaker towards the end of the year, says Skordeles.
“The economy is definitely slowing down,” Skordeles says, adding that while he doesn’t expect a sudden slump in economic activity, he hasn’t given up on his forecast that the US will experience a shallow recession.
Advertisements – Scroll to continue
Economist Jason Furman, in a post on X formerly known as Twitter, noted that GDPNow model forecasts typically trend up by about a percentage point at this point in any given quarter. Excluding the 2020 estimates, he wrote, the forecasts as of this writing have a standard deviation of about 1.5 percentage points.
The model’s biggest failure (excluding 2020) occurred on Aug. 17, 2021. The GDPNow estimate was 6.2% and the government’s flash estimate for GDP was 2.0%, Furman said.
Markets appear to have ignored the latest GDPNow estimate. According to the CME FedWatch tool, which tracks movements in interest rate futures, the probability that the Fed will leave interest rates unchanged in September was 90.5% on Friday. And that was slightly higher than on Wednesday.
So yes, be patient. The latest GDPNow estimate signals to investors and markets that the US economy is nowhere near a recession. However, the third quarter is still 43 days away and several key economic reports are yet to be released. By mid-September, the view from Atlanta could be different.
Write to Megan Leonhardt at [email protected]
Comments are closed.