GDPNow Silliness

by Mish

As of Thursday, the GDPNow model sits at 4.0%. My typical gambit is sufficient: “I’ll take the under, way under.”

GDPNow Forecast June 1, 2017

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2017 is 4.0 percent on June 1, up from 3.8 percent on May 30. The forecasts for second-quarter real nonresidential structures investment growth and real government spending growth fell from 6.2 percent and -0.3 percent to 3.4 percent and -0.7 percent, respectively, after this morning’s construction spending release from the U.S. Census Bureau. The forecasts for second-quarter real consumer spending growth and real nonresidential equipment investment growth increased from 3.3 percent and 5.1 percent to 3.6 percent and 6.6 percent, respectively, after this morning’s Manufacturing ISM Report On Business from the Institute for Supply Management. The model’s estimate of the dynamic factor for May—normalized to have mean 0 and standard deviation 1 and used to forecast the yet-to-be released monthly GDP source data—increased from 0.30 to 0.72 after the report.

I have been waiting for common sense to prevail in the GDPNow model. Indeed, I expected sanity to prevail after Thursday’s disastrous construction spending report.

Instead, on the highly unreliable ISM diffusion index that’s been wrong for years, the GDPNow forecast rose from 3.8% to 4.0%.

Second Quarter Reality

1. Construction Spedding: Construction Spending Falls Sharply, March Revised Higher: Construction Spending Mysteries
2. Motor Vehicle Sales: Motor Vehicle Sales Flat, Hope Turns to Second Half: What About Fleet Sales? Incentives?
3. April Durable Goods shipments down 0.3%, new orders down 0.7%: April Durable Goods: Yet Another Weak Second-Quarter Report
4. Wholesale Inventories: Down 0.3% in April. March revised lower from 0.2% to 0.1%.Retail Inventories: Down 0.3% in April. March revised lower from 0.5% to 0.3%. For details, please see Fed Eyes Second Quarter Recovery, Expects Trump Fiscal Policy Will Expand Economy
5. Trade deficit in April widens by 3.8% with exports down and imports up: Trade Deficit Widens, Exports Weak: Economists Miss the Mark
6. Tax Receipts: Federal Tax Receipts Running Below Expectations
7. April New Home Sales: New Home Sales Contract 11.4%: Sales Barely Up Year-Over-Year
8. April Existing Home Sales: New Home Sales Contract 11.4%: Sales Barely Up Year-Over-Year
9. April Existing Home Sales: Spring Housing Flop: Existing Home Sales Decline 2.3 Percent, Inventory Issues Persist
10. April Housing Starts: About that Strong April Recovery: Housing Starts and Permits Flop, March Revised Lower
11. April Empire State Manufacturing Survey: Empire State Manufacturing Survey Turns Negative: Welcome News?
12. April Retail Sales: Sales were at least positive (+0.4%), but they were well under economists projections: Retail Sales Disappoint Again: Department Stores Clobbered in 2017

I fail to see how we can possibly come close to 4.0% growth in the second quarter with those reports.

In the first quarter, the FRBNY Nowcast went off base with ISM data. This quarter its GDPNow in the spotlight.

For a discussion of the construction spending impact, please see First Quarter GDP Second Estimate 1.2 Percent: Mish vs. Consensus and the embedded links on revisions and weather.

Also consider ISM-Markit Manufacturing Divergence Widens Again

As I have stated numerous times, the problem with models is Models Cannot Think. It’s plug and play, baby.

Mike “Mish” Shedlock