Just over a month ago, The Atlanta Fed surprised economic watchers when in early August it unveiled that its Q3 GDP tracker was predicting that the US economy would grow at an annualized pace of 3.6% (and as high as 3.80%) a substantial rebound from the “deplorable” 0.8% and 1.1% growth rates in Q1 and Q2, respectively. To be sure, many expressed surprise at the underlying assumptions that would send US economic growth soaring in the second half: after all, it was a near record surge in consumer spending that boosted first half GDP – and kept it positive – as all other components, most notably Capex, tumbled into a non-consumer recession. Alas, the spending surge that boosted first half growth has now fizzled, as monthly personal spending data confirmed, so it stood to reason that these overoptimistic estimates for GDP growth would ultimately be revised substantially lower.
Sure enough, moments ago in the latest revision to the Atlanta Fed forecast, the model has now unveiled its first sub-3% GDP growth estimate, printing at 2.9%, and the lowest in this particular series’ lifetime. This is what the Atlanta Fed said:
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2016 is 2.9 percent on September 20, down from 3.0 percent on September 15. The forecast of third-quarter real consumer spending growth ticked down from 3.1 percent to 3.0 percent after last Friday’s Consumer Price Index release from the U.S. Bureau of Labor Statistics. The forecast of third-quarter real residential investment growth remained at -6.3 percent after this morning’s housing starts release from the U.S. Census Bureau.
But what was most notably about the Atlanta Fed’s Q3 GDP estimate is how much higher they were compared to Wall Street’s own forecasts. Well, no more.
Finally, one thing to note is that the Atlanta Fed assumes a substantial inventory build in the current quarter, one which would boost GDP by over 0.5%. Since the various ISM, PMI and regional Fed diffusion indices have failed to confirm such an inventory build. Absent this boost, Q3 GDP drops to 2.3%, and is then set to decline even more in Q4. Whether that will impact the Fed’s decision-making remains to be seen.
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