I had a conversation with GDPNow creator Pat Higgins on the difficulty of making estimates.
GDP for the first quarter dipped to -0.3 percent on a surge in imports. Real final sales, was a horrendous -2.50 percent.
Real Final Sales is the bottom-line estimate of the economy. The difference between the base forecast and RFS is change in private inventories (CIPI) that nets to zero over time.
As noted on April 29, The Final GDPNow GDP Forecast for 2025 Q1 was -1.5 Percent
The GDPNow RFS forecast was -1.8 percent, closer to the mark but too high by 0.7 percentage points.
In contrast the GDPNow base forecast was too low by 1.2 percentage points.
Those are unusual misses after doing exceptionally well with the Nowcast for many quarters.
But the model was very close on Real Final Domestic Sales and Real Final Private Domestic Sales.
GDPNow Final Forecast vs Actuals 2025
GDPNpw was very close on real domestic sales, just not all sales.
My Question to Pat Higgins
Hi Pat
GDPNow was amazingly close on real domestic final sales and real private domestic final sales but not base GDP or total real final sales.
Do you have an explanation and does this portend any discrepancies for Q2?
Thanks
Mish
Reply from Pat Higgins
Note: This conversation occurred on June 4 and is a bit out of date but the principles apply.
Hi Mish,
I can’s say too much other than point you to my macroblogs on Challenges in Forecasting GDP Growth Last Quarter and This Quarter. There were some upward adjustments to March inventories that the BEA made to nondurable manufacturing inventories in the second GDP release and merchant wholesale trade inventories in the first one that GDPNow wouldn’t have captured.
Here are the related excerpts from the GDP Preliminary Release.
Within investment, an upward revision to private inventory investment primarily reflected an updated BEA adjustment to Census Bureau book value data to account for notable increases in imports. Updated and newly available information on the industries impacted the adjustment and led to an upward revision to nondurable goods manufacturing (specifically, chemical manufacturing) that was largely offset by a downward revision to nondurable goods wholesale trade (drugs and sundries).
Here are the related excerpts from the GDP Advance Release.
The largest contributor to the increase in investment was private inventory investment, led by an increase in wholesale trade (notably, drugs and sundries). The estimates of private inventory investment were based primarily on Census Bureau inventory book value data and a BEA adjustment in March to account for a notable increase in imports.
I mention the possible implications for GDPNow’s inventories forecasts in the second quarter GDP release in the second macroblog.
It’s unclear whether the reverse phenomenon—spending on goods drawn from inventories that are not accounted for in the published Census Bureau inventories data—can or will occur.
But we can anticipate that it is likely that either the BEA’s estimate of inventories contribution to first-quarter GDP growth will be revised down or GDPNow’s projected contribution of it to second-quarter GDP growth will be revised down on June 27.
Until June 27, GDPNow will make its own calculation of first-quarter CIPI in GDP using Census Bureau data on the book-value of inventories and BEA data for the remainder of the CIPI related data. This is because using Census Bureau book-value data usually generate virtually the same CIPI estimate for the prior quarter as what one would get using only the BEA data immediately after the GDP release. This allowed the model to anticipate BEA revisions of CIPI for the prior quarter in second and third release GDP estimates after Census Bureau revisions to monthly inventory book values.
However, GDPNow currently calculates a first-quarter annualized CIPI of $94 billion in 2017 dollars, while the BEA calculated it as $140 billion. [Mish Note: That difference accounts for the big GDPNow misses. As of June 18, the GDPNowcast of CIPI is little changed at $97 billion].
With respect to the July 30 2025:Q2 GDP release, 2025:Q1 CIPI will be “frozen” at the level published in the June 26 GDP (third) release estimate. So GDPNow would switch to the temporarily “frozen” BEA estimate on June 27. [Mish Note: Frozen means until annual revisions]
If both GDPNow and the BEA estimates for CIPI remain at their current, but different, estimates through June 26, the GDPNow switch to the higher 2025:Q1 value for CIPI would reduce its topline nowcast by 0.8 percentage points on June 27.
Historically GDP nowcasts tend to be less accurate when forecaster disagreement is high.
Forecaster Disagreement Is Still High
Since June 1, the GDPNow nowcast declined from 4.6 percent to 3.8 percent.
The Blue Chip Forecast rose in late May to a high of under 2.0 percent. Assuming a similar direction to GDPNow, the Blue Chip estimate may be more like 1.5 percent.
Subtracting 0.8 percentage points from GDPNow would yield 3.0 percent, still a big gap.
Looking Ahead
We cannot ignore the data between June 18 and June June 27, except there was very little of it, so far. Housing starts were miserable, but that report was on June 18 and is reflected in the charts.
On June 26, the Commerce Department reports durable goods and the BEA reports the “final” (until annual revisions) GDP for Q1.
Also on the 26th, we have International Trade in Goods. That’s the report that sent everything haywire in Q1 then caused the spike higher in Q2 on the lead chart.
The Bloomberg Econoday Consensus trade estimate is $-90.7 Billion in a wide range of $-93.0 billion to $-70.0 billion.
What matters is what happens vs the model expects. I highly doubt the model expects a deficit of a mere $70.0 billion. Should that happen, I believe GDP estimates would soar.
In contrast, I suspect a deficit over $90.0 billion would likely to be negative to the model.
Key reports on the 26th plus Personal Income and Outlays on the 27th will heavily influence the forecasts. GDPNow on the 27th will reflect Personal Income and Outlays.
The Bloomberg Econoday range of Personal Consumption Expenditures is -0.2 % to 0.4 % with a consensus of 0.2 percent. That seems high given a dismal retail sales report for May.
However, it not the consensus estimates that matter. It what the model expects that matters.
Big thanks to Pat Higgins for his time.
Related Posts
June 16, 2025: QCEW Report Shows Overstatement of Jobs by the BLS is Increasing
The discrepancy between QCEW and the BLS jobs report is rising.
June 17, 2025: Retail Sales Down Much More than Expected, Drop 0.9 Percent
Retail sales declined 0.9 percent led by autos down 3.5 percent.
June 23, 2025: Existing-Home Sales Rise 0.8 Percent in May, Inventory Soars
Existing home sales rose but flounder at low levels. Rising inventory will eventually impact prices.
It’s pretty much wait and see, which is what Powell is doing.
Lies, damned lies and government “sadistics.”
Retail MMMFs peak at the start of recessions. We are close:
Retail Money Market Funds (RMFNS) | FRED | St. Louis Fed
Large CDs are associated with velocity:
Large Time Deposits, All Commercial Banks (LTDACBM027NBOG) | FRED | St. Louis Fed
As Dr. Philip George says: “The velocity of money is a function of interest rates”
As Dr. Philip George says. “When interest rates go up, flows into savings and time deposits increase”.
As Dr. Philip George puts it: “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits”.
The economy is being run in reverse. To get lower long-term rates you drive the banks out of the savings business (which doesn’t reduce the size of the payments’ system). It just makes it more profitable. At the same time, you tighten monetary policy.
But the miscreants are stupid. The ABA won’t permit it. Myopia is prevalent.
See: “Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.
“Profit or Loss from Time Deposit Banking”, Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386
The draining of the O/N RRP facility and the growth of MMMFs has also bolstered economic growth.
The economy is decelerating but the 2nd qtr. isn’t a concern. What’s prevented a recession so far is the shift in the percentage of DDs to TDs. DDs turn over faster than TDs. And the percentage of DDs to TDs has doubled.
Link: George Garvey:Deposit Velocity and Its Significance (stlouisfed.org)
“Obviously, velocity of total deposits, including time deposits, is considerably lower than that computed for demand deposits alone. The precise difference between the two sets of ratios would depend on the relative share of time deposits in the total as well as on the respective turnover rates of the two types of deposits.”
“Prediction is difficult- particularly when it involves the future.”
— Mark Twain
They didn’t have Computers or Data Points to reference as we do today. Most forecast would be based upon the last 24, 18, 12 & 6 Month Windows I suspect.
They can then play with that Data to show us what a 6, 12, 18 & 24 Month change would look like, etc.
once they settle on a set of Data Points that work best for them, and that’s what we will see. I suspect the next report to be a tad positive, and as we get closer to Mid-Terms that will all change of course, if it has to before then, it will too, but I suspect we’re good until the next drop needs to be hidden a bit more…
Who knows what Tariffs will bring, and perhaps the Data corrects itself with Amazing Real Data Points that can be utilized. Nobody knows yet, but we all will soon enough…
Well said, Nate! But if I my gander a guess, my simple prediction is that GDP has recovered considerably since Q1. Net exports are up considerably for the time being. This will taper off as the trade distortions become less volatile. Any final GDP reading for Q2 at or above 3% is a very good sign for the economy. If tariffs are going to impact inflation meaningfully, we should see the trend once July’s data is available.
Ben, what are your thoughts on this data being affected, by the front running to fight the onset of Tariffs?
It’s my understanding that Net Exports turned positive in late May. This would suggest that all of the “front running” of imports had ended, and we’ve moved into a period of reduced imports which is consistent with higher tariffs & higher net exports.
I agree that we’re still in a period of balancing. More than likely the current GDPNow forecast is overstated, but I think it’s hard to say by how much.
While it’s still too early to make good predictions on how these tariffs are going to work out, it’s fair to say that Trump’s long-term goal is for net exports to be higher as time passes.
I just think most of the TDS types around here would have expected the economy / inflation to be worse than what it is.
With all that said, I realize we’re far from being out of the woods in terms of the tariffs effects on consumer prices which is the whole reason the Fed, much Trump’s chagrin, is holding steady, which I believe is the right decision. I think the real effects of tariffs will be fleshed out by the July data which will arrive in August.
Unless there’s a late summer surprise, I don’t see movement before September. This is a much tougher call than three years ago. Back then, Powell was smoking crack not to see that he should have raised rates much sooner.
The bottom line is the Fed is already 100 BP below the high, so they’ve already taken steps to ease up lending costs.
I appreciate your input here, and I agree that the economy is in much better shape than many have it. Heck, it was on life support not long ago, if you believed what you heard.
I think the Tariffs will be much more positive than most give them. There are multiple things happening at the same time, and Tariffs are just one of them. I think as many of the other things going on, start to work themselves out, it will be positive for the Tariffs. They are not going anywhere by the looks of it, as Trump is All In!
Depending how fast we can get the massive amount of investment money heading this way, and put to work, will let us know how fast we can get the workers hired, and our job situation moving in the right direction. That will indeed change things quite a bit, as these will be decent paying jobs.
Going to be a long Summer…