Just over a month ago, The Atlanta Fed surprised economic watchers when in early August it unveiled that its Q3 GDP tracker was predicting that the US economy would grow at a blistering annualized pace of 3.6% (and as high as 3.80%) a rather dramatic rebound from the "deplorable" 0.8% and 1.4% growth rates in Q1 and Q2, respectively.
Many expressed surprise at the underlying assumptions that would send US economic growth soaring in the second half: after all, it was a near record surge in consumer spending that boosted first half GDP – and kept it positive – as all other components, most notably Capex, tumbled into a non-consumer recession. Alas, the spending surge that boosted first half growth has now fizzled, as today’s disappointing personal spending data confirmed, so it stood to reason that these overoptimistic estimates for GDP growth would ultimately be revised substantially lower.
Sure enough, moments ago in the latest revision to the Atlanta Fed forecast, the model has just slashed its formerly exuberant GDP growth estimate again, down to a paltry by comparison 2.4%, below last Friday’s 2.9%, and down to the lowest in this particular series’ lifetime.
This is what the Atlanta Fed said:
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2016 is 2.4 percent on September 30, down from 2.8 percent on September 28. The forecast of third-quarter real consumer spending growth declined from 3.0 percent to 2.7 percent after this morning’s personal income and outlays report from the U.S. Bureau of Economic Analysis (BEA). Following yesterday’s GDP revision from the BEA and the Advance Economic Indicators release from the U.S. Census Bureau, the forecast of the contribution of inventory investment to third-quarter growth decreased from 0.60 percentage points to 0.26 percentage points and the forecast of the contribution from net exports increased from -0.13 percentage points to 0.13 percentage points.
But what was most notable about the Atlanta Fed’s Q3 GDP estimate is how much higher it was compared to Wall Street’s own forecasts. Well, no more.
Finally, one thing to note is that the Atlanta Fed assumes a substantial inventory build in the current quarter, one which would boost GDP by over 0.5%. Since the various ISM, PMI and regional Fed diffusion indices have failed to confirm such an inventory build. Absent this boost, Q3 GDP drops to 1.9%, and is then set to decline even more in Q4 according to the NY Fed. How that will impact the Fed’s December rate hike "strategy", remains to be seen.