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Despite Good ISM Service Numbers the GDPNow Forecast Did Not Change Much

Given the GDPNow history of strong initial forecasts that fade on later data, the early trend looks recessionary, especially with the Fed expected tightening.
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GDPNow Data from Atlanta Fed. Chart by Mish.

GDPNow Data from Atlanta Fed. Chart by Mish.

Please consider the latest GDPNow Forecast update.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 1.4 percent on August 4, up from 1.3 percent on August 1. After the August 1 GDPNow update and recent releases from the Institute for Supply Management, US Census Bureau, and the US Bureau of Economic Analysis, the nowcast of third-quarter real personal consumption expenditures growth increased from 1.5 percent to 1.8 percent, while the nowcast of the contribution of the change in real net exports to third-quarter real GDP growth decreased from 0.42 percentage points to 0.35 percentage points.

International Trade in Goods and Services 

International Trade in Goods and Services from Bloomberg Econoday

International Trade in Goods and Services from Bloomberg Econoday

Despite a trade improvement, the GDPNow change in real net exports to third-quarter real GDP growth decreased from 0.42 percentage points to 0.35 percentage points.

Once again, it it not the data that matters but rather the data vs the model's expectation.

For whatever reason the model expected more. ISM is more interesting. 

ISM Services Smashes Estimates to the Upside, S&P Services Is Deeply Negative

On August 3, I reported ISM Services Smashes Estimates to the Upside, S&P Services Is Deeply Negative

The two reports are seriously conflicting.

For June the ISM® Services index was 55.3. Bloomberg Econoday economists expected the index to drop to 53.0.

The S&P report went the other direction.

  • The S&P reported "Business activity declines for first time in over two years amid soft demand conditions. The overall fall in output was the largest recorded since the global financial crisis and signals a strong likelihood that the economy will contract for a third consecutive quarter." 
  • ISM® “The past relationship between the Services PMI® and the overall economy indicates that the Services PMI® for July (56.7 percent) corresponds to a 2.4-percent increase in real gross domestic product (GDP) on an annualized basis.

I think Chris Williamson at the S&P has this one correct regarding the "strong likelihood that the economy will contract for a third consecutive quarter."

GDPNow only looks at ISM numbers not the S&P Global US Services PMI.

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This sets the stage for a big negative surprise to the GDPNow model that appears to expect improving number.

Watch Real Final Sales

The number to watch is Real Final Sales, not the baseline GDPNow estimate. The difference between the numbers is inventory adjustment that nest to zero over time. 

RFS is the bottom-line estimate for the economy. 

Much of GDP changes very little throughout the quarter (military spending, Medicare, Social Security, food stamps, etc.)

It's cyclicals (durable goods and housing) that tend to drive expansions and recessions.

July may see improvement on inflation based on energy. But rent (over 31 percent of the CPI) is still rising. Consumer sentiment is poor and inflation-adjusted retail sales do not rate to be good for the entire quarter.

Cyclical Discussion

Housing will be another big bust this quarter. And durable goods rate to follow housing. Manufacturing rates to be negative.

Hopes for the quarter rest solely on consumer spending and falling inflation. But don't count on strong retail sales.

Add it all up and you have a third quarter of negative GDP.

This post originated at MishTalk.Com.

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