U.S. growth back in bloom: most accurate Q1 GDP forecasters

May 30, 2014

PMost are convinced, including Federal Reserve Chair Janet Yellen, that the U.S. economy has already warmed up significantly from a growth deep freeze at the start of the year.

Business inventories were run down to nearly nothing in the first quarter, and were set for a rebound. There also is no sign that consumer spending is about to veer off its recovery path, especially with the job market gradually improving. All of that is likely to underpin better economic growth.

The question is by how much. Growth in the current quarter is forecast to be anywhere from 1.4 percent to 6 percent, according to a Reuters survey of 75 economists taken last week. That is the widest forecast range for U.S. economic growth in all Reuters polls in four years, except for one survey last April.

Typical gauges of uncertainty in financial markets tell a different story. The CBOE Volatility Index touched its lowest in over a year last week. All the while the S&P 500 has been hitting record highs almost daily, which at face value doesn’t give the impression of a lot of doubt about the recovery.

Digging a bit deeper into the numbers, the range of forecasts for Q2 growth is significantly narrower among those who came the closest to getting it right for Q1. That goes from 2.7 percent to 4.2 percent, with the Reuters consensus nearly bang in the middle at 3.5 percent.

Michael Feroli at JP Morgan, one of the banks that came closest to predicting the magnitude of the revised Q1 downturn ahead of the figures this week, wrote:

Despite the ugly headline, the details of the revision are actually favorable for second quarter GDP: almost all of the revision was due to a downward-revised estimate of the pace of inventory accumulation in Q1, which should allow for a more rapid pace of production this quarter as businesses are operating with less of an inventory overhang.

In absolute terms the report is not good, but in terms of the information contained in the revision, we now feel more comfortable about Q2 GDP prospects, which, while early, we still have pencilled in at 3.0 percent.

Wrightson ICAP, also among the most accurate forecasters in the Reuters poll, expects 3.0-3.5 percent growth.

On the lower end, 2.7-3.0 percent, were Barclays, RBC, UBS, Wells Fargo and First Trust Advisors.

Morgan Stanley, Scotiabank, Societe Generale, Goldman Sachs, Credit Suisse and Deutsche Bank are at the higher end, expecting 3.8-4.2 percent.

If Q2 GDP growth comes within this narrower range, the U.S. recovery story remains intact and won’t likely sway the Federal Reserve off its current policy path, which is to carry on reducing its monthly bond purchases to nil but leave interest rates unchanged well into next year.

Lou Crandall, Wrightson’s chief economist, said:

There’s widespread belief that actual economic activity is going to be solid in the monthly data going forward. But how that translates into an official GDP estimate is essentially random.

… if you look at them over time and how they evolve from one annual revision to the next, it is entirely possible that the Q1 number will end up being -2.0 percent 18 months from now or +2.0 percent.

So what that means is that it’s not the dynamics of the economy that people are uncertain about, it’s the dynamics of the GDP tabulation.

The problem, of course, is that the consensus for Q1 just a short five months ago was for growth of 3 percent, 4 percentage points higher than what was actually reported.

Crandall said:

You are not seeing a lot of radical divergences in opinion about more important high frequency numbers. This is just all about the dynamics of the GDP estimates themselves.

— with additional reporting by Ishaan Gera

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