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Based on the latest economic forecasts from the Federal Reserve Bank of Atlanta, the US economy is going from boiling to boiling — a worrying development for the Federal Reserve, and everyone else hoping interest rates won’t go up.
But don’t panic just yet: The Atlanta Fed’s GDP-Now Model estimate for real growth in GDP for the third quarter, revised upward on Wednesday to 5.8% from 5.0% the week before, is not an official forecast. It’s not even forward-looking, but is based on “available economic data for the current measured quarter.” And it is likely to be revised lower – perhaps significantly lower – as the third quarter begins.
Guns N’ Roses might have said it best: “All we need is a little patience.”
The latest reading came after data on housing stocks in July, which jumped 6.7% month over month, and reports showing industrial production rose sharply last month. Strong housing data, in particular, helped spur the GDP revision now, as the contribution of residential investment to the model has jumped from -0.2% to +0.42%.
On the surface, the latest GDP reading now looks like bad news for the Federal Reserve, which has been trying to cool the economy with sharp interest rate increases to bring down inflation. The current target range for the federal funds rate is 5.25% to 5.5%, which is the highest level in 22 years.
“Recent estimates of third quarter GDP, along with new retail sales data, point to a much stronger underpinning of the economy, certainly not what the Fed wants to see as they navigate the so-called ‘last mile’ toward price stabilization,” wrote Quincy Crosby, Sr. Global Strategists at LPL Financial, recently.
If the latest GDP rate holds now — the seasonally adjusted annual rate was just 4.1% two weeks ago — it will be the fastest rate of growth since 2003, Schwab’s chief investment analyst, Liz Ann Saunders points out.
But there is little chance that it will survive.
The GDP model is now based strictly on data that has already been released, says Mike Skordellis, head of US economics at Truist Advisory Services. Barron. Not all July data has been released yet, let alone economic readings for August and September.
“As this data comes in — just like we’ve seen with some of these numbers, particularly housing starts and production in the last couple of days — it pushes that[GDP]number a lot,” Skordilis says. “This is especially true early in the quarter, because 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 now fueling GDP will be revised lower. For example, the Bureau of Labor Statistics made sharply downward revisions to salary growth for May and June, and it can revise the job count for July when it provides August data.
While the GDP model now reflects strength in July data for retail sales, auto sales, housing starts and industrial production, Skordeles says most of this resilience was more a “one-off” than a reflection of a permanent trend. The expected strength in the July reports also got a boost from the double counting of some items, notably the auto and residential construction data that appear in many of the agency’s reports.
While new home construction was strong in July, new building permits — generally seen as a leading indicator — are not currently factored into the GDP estimate now, Skordellis notes. Permits ran 13% below 2022 levels. Moreover, housing data for July does not reflect the mortgage-related fallout from the latest rate hike. Average 30-year mortgage rates rose to record highs last week. Given these factors, Skordeles says, housing in general looks weaker as we approach the end of the year.
“The economy is definitely slowing,” Skordilis says, adding that while he doesn’t expect a sudden collapse in economic activity, he hasn’t given up on his prediction that the United States will experience a shallow recession.
economic Jason Foreman notes In a post on X, formerly Twitter, that at this point in any given quarter, GDPNow model forecasts typically bias upwards by about one percentage point. Excluding the 2020 estimates, he wrote, the projections at this point have a standard deviation of about 1.5 percentage points.
The biggest error in the model, excluding 2020, was on August 17, 2021. The GDP estimate was now 6.2%, and the government’s advance estimate of GDP came in at 2.0%, Furman said.
Markets seem to have ignored the latest GDP estimates for now. On Friday, odds of the Fed keeping the federal funds rate unchanged in September were at 90.5%, According to CME FedWatch, which tracks movements in interest rate futures contracts. That was slightly higher than Wednesday’s reading.
So, yeah, be patient. What the current GDP estimate suggests to investors and the markets is that the US economy is nowhere near recession. But there are still 43 days left in the third quarter, and many important economic reports have yet to be released. By mid-September, the view from Atlanta may look different.
Write to Megan Leonhardt at megan.leonhardt@barrons.com
