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GDPNow Forecast for Q3 Plunges to 0.5 Percent on Weak Consumer Spending

This one was easy to spot in advance. The negative retail sales revision for July and weak numbers for August telegraphed this decline in the GDPNow forecast.
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GDPNow data from Atlanta Fed, chart by Mish.

GDPNow data from Atlanta Fed, chart by Mish.

GDPNow Plunge 

Please consider the September 15 update to the GDPNow Forecast for Q3 GDP.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 0.5 percent on September 15, down from 1.3 percent on September 9. After this week's releases from the US Department of the Treasury's Bureau of the Fiscal Service, the US Bureau of Labor Statistics, the US Census Bureau, and the Federal Reserve Board of Governors, decreases in the nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth from 1.7 percent and -6.1 percent, respectively, to 0.4 percent and -6.4 percent, respectively, was slightly offset by an increase in the nowcast of third-quarter real government spending growth from 1.3 percent to 2.0 percent.

The up-down, up-down pattern of the GDPNow forecasts finally collapsed into a down-down pattern on weak jobs followed by weak retail sales data.

Base Forecast vs Real Final Sales

The real final sales (RFS) number is the one to watch, not baseline GDP.

RFS ignores changes in inventories which net to zero over time. This is a good reason to ignore the talk of two quarters of declining GDP being a recession.

Spotlight on Current Real Final Sales (RFS) Estimate 

  • Total: 1.1 Percent (Lead Chart)
  • Total Domestic: 0.0 Percent
  • Total Private Domestic: -0.4 Percent

The real final sales number is the bottom line estimate for the economy. The rest is inventory adjustment that nets to zero over time. 

Real private sales to final domestic purchasers fell to -0.4 percent from +0.6 percent on September 7. 

Government spending added 0.6 percentage points to RFS and now helps to prop up the economy. 

Quick - Send more money to Ukraine and escalate student loan writeoffs to aid spending.

September 7 Comments 

Let's review my September 7 comments from GDPNow Model for the Third Quarter Surges Then Immediately Dives, What's Happening?

Retail sales plunged in May after a strong April, and that's when housing started to crumble as well.

1.9 percent on real final sales is not recession territory, but I strongly believe that will not hold up. GDPNow forecasts tend to start out strong then fade as the quarter progresses.

There is still two months of data for Q3 coming up. Retail sales and housing rate to be weak. But will they be weaker than the model expects?

My guess is yes. 

For the GDPNow model estimate to sink, the data does not have to be weak. It does have to be weaker than the model projected. 

Today, the retail sales estimate was both weak (irrelevant to the model), and weaker than the model expected, the pertinent factor. 

When I saw the big negative revision to the July retail sales number, I was pretty confident the data was weaker than the model expected.

Factoring in Revisions and Inflation, Retail Sales Remain Very Weak

Real vs Nominal Advance Retail Sales Detail 2022-08
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In advance of today's GDPNow forecast but following the retail sales data I commented Factoring in Revisions and Inflation, Retail Sales Remain Very Weak

Recession Analysis

The numbers from March to December 2021 are very recession looking in isolation. But housing was humming nicely.

GDP was negative in the first and second quarters of 2022, but GDP real final sales (not the same as retail sales) were positive in the second quarter.

On the retail front, consumers picked up the pace between January and April of 2022. Real retail sales rose from 226,467 million to 233,739 million. That's a 3.2 percent inflation-adjusted rise in retail sales and not at all consistent with a recession, even a weak one.

Starting in May, both retail sales and housing slumped. This is why I pegged recession with a start date of May (in advance), expecting continued weak retail sales coupled with abysmal housing.

The revisions to July and weak August numbers remain consistent with a weak recession that started in May

We may easily see three or four quarters of negative GDP with relatively strong jobs because we never fully filled the losses from the pandemic.

Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

Lost in the debate over whether recession has started, is the observation that it doesn't matter much either way.

For discussion, please see Expect a Long Period of Weak Growth, Whether or Not It's Labeled Recession

Housing leads recessions and recoveries and housing rates to be weak for a long time.

Add it all up and you have the opposite of the Covid-recession, a long period of economic weakness with minimal rise in unemployment.

Looking Ahead

Looking ahead to the next few months, housing rates to be terrible and retail sales weak. 

If there are more revisions to retail sales expect them to be lower. 

There is still another month of data for the third quarter. And at this pace, we are headed for a third quarter of negative GDP. 

Increasingly Likely That Alleged Job Strength is a Mirage of Part Time Second Jobs

Jobs are nowhere near as strong as they appear.

For discussion, please see Increasingly Likely That Alleged Job Strength is a Mirage of Part Time Second Jobs

It does not matter whether you label this a recession or not. Besides, the NBER might not even announce the recession until it's over. That happened once already.

What does matter is the Fed will likely keep hiking until the economy collapses. It won't be fun.

This post originated at MishTalk.Com

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