A Look Ahead to Friday’s 1Q GDP Report
The Commerce Department will release its first estimate of first quarter 2017 gross domestic product on Friday, April 28. Estimates of the growth rate for GDP vary widely leading up to the release of the report. The Federal Reserve Bank of New York produces a “nowcast” estimate on a weekly basis. A nowcast is a real-time estimate based on currently available data. As of April 21, the FRBNY estimate for first quarter real GDP growth stands at 2.7 percent. That would be an acceleration from the 2.1 percent growth rate of fourth quarter 2016 real GDP. The FRBNY estimates second quarter 2017 real GDP growth at 2.1 percent.
The Federal Reserve Bank of Atlanta also does a nowcast for GDP. As of April 18th, the FRBA estimate for first quarter real GDP stands at just 0.5 percent, a sharp contrast to the NYFRB nowcast. The two Federal Reserve Banks use significantly different methodologies for creating their estimates. The two approaches can produce dramatically different results. FactSet Research shows the consensus estimate among economists for first quarter real GDP growth is currently 1.5 percent, just about midpoint between the two nowcasts.
The Federal Reserve Bank of Chicago produces a measure of economic activity called the Chicago Fed National Activity Index. This index uses a mathematical technique called principal component analysis to determine the common movement among 85 different economic data series. The technique produces an index where zero represents trend growth, positive numbers suggest above-trend growth and negative numbers suggest below-trend growth. For March, that index registered a 0.08 reading, suggesting slightly above-trend growth. Because that index tends to be volatile, economists often look at the three-month average. The three-month average through March came in at 0.03, confirming the slightly-above-trend growth signal from the March monthly result.
Over the past 20 years, real GDP growth has averaged 2.3 percent, so if the CFNAI is correct, real GDP growth for first quarter is likely to be closer to the FRBNY rather than the FRBA and should come in above consensus expectations.
Two points should be kept in mind when the GDP data are released on Friday. First, this is the initial estimate for GDP and subsequent revisions over the next two months may tell a different story than the initial estimate. Second, there is always more to the story than just headline real GDP growth. Private domestic demand is a key measure within the GDP report. The sum of consumer spending, residential investment and business investment tends to reflect domestic economic conditions better than the headline GDP. Government spending may be influenced by political motivations. Net trade is heavily impacted by the strength of the dollar and economic conditions in other countries. Inventory changes can be volatile from one quarter to the next but generally don’t add much to economic output over the long-term.
Like all economic data, the GDP report will be an estimate, subject to revisions as well as white noise. The best way to think about the numbers is to look for the underlying trends and relate them to the broad range of other economic signals. In that context, Friday’s report is likely to show the economy remains on a moderate trend-growth path, consistent with the solidly positive AIER Leaders index that came in at 83 (on a scale of zero to 100, with numbers above 50 suggesting continued economic expansion and numbers below 50 suggesting a heightened risk of recession) in March, and the strong reading from the AIER Coinciders index that posted a perfect 100 reading in March.
Robert Hughes
Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.
