Fed Models Suddenly Call for Stronger Than Expected GDP Growth

By Jon C. Ogg Updated Jan 6, 3:42AM EST · Published Jun 14, 12:20PM EDT

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Fed Models Suddenly Call for Stronger Than Expected GDP Growth — © marchmeena29 / iStock

With all the media’s calls for a recession in the coming quarters, the public frequently gets very mixed information and opinions about the real state of the economy. The first quarter’s stronger gross domestic product (GDP) is expected to slow down over the course of 2019, but things are not looking as bleak as some of the worrywarts might have suggested.

The Atlanta Federal Reserve Bank’s GDPNow model now projects real GDP growth in the second quarter of 2019 of 2.1%, on a seasonally adjusted annual rate. This is still shy of the first quarter, but the first quarter’s strong gains (3.1%) included some one-time benefits that skewed the numbers.

What matters about Friday’s GDP forecast from the Atlanta Fed is that this is up from its June 7 forecast for second-quarter GDP to rise by only 1.4%. The culprit for the higher GDP was Friday’s 0.5% gain retail sales for May and the higher revision for retail sales in April. The fresh report on industrial production also contributed to the rise. The so-called nowcast of second-quarter real personal consumption expenditures growth also increased from 3.2% to 3.9%.

As a reminder, the GDPNow is not an official forecast made by the Atlanta Fed. What the reading does is to provide a running estimate of real GDP growth based on available data for each quarter. The Atlanta Fed also notes that there are no subjective adjustments made to the GDPNow updates and that the numbers are based solely on the mathematical results of the model.

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Other regional Fed branches measure data differently. The Federal Reserve Bank of New York also updated its Nowcast for the second quarter on June 14. That Nowcast stands at 1.4% (1.36%) for the second quarter of 2019 and 1.7% growth for the third quarter of 2019. The June 7 reading was projecting for second-quarter GDP to be up by only 1.01%, and it was as high as 2.2% back in early May.

While these GDP forecast models are now better than they had been recently, neither the stronger Atlanta projection nor the higher New York Fed projection will be viewed as stellar growth by the markets and the public.

As for the Bureau of Economic Analysis revision at the end of May, the current–dollar GDP level in the first quarter was for the annualized GDP to be measured at $21.05 trillion.

These numbers also may create some background confusion for the markets as the investing community has been treating weaker growth as good news because it increases the chances that Fed Chair Jerome Powell and the Federal Reserve will need to cut interest rates sooner rather than later. Much will depend on how deep the tariffs and other trade war actions come into play in the months ahead, but does the Fed really need to be aggressively lowering interest rates with the unemployment rate under 4% and with GDP running closer to 2%?

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About the Author Jon C. Ogg →

Jon Ogg has been a financial news analyst since 1997. Mr. Ogg set up one of the first audio squawk box services for traders called TTN, which he sold in 2003. He has previously worked as a licensed broker to some of the top U.S. and E.U. financial institutions, managed capital, and has raised private capital at the seed and venture stage. He has lived in Copenhagen, Denmark, as well as New York and Chicago, and he now lives in Houston, Texas. Jon received a Bachelor of Business Administration in finance at University of Houston in 1992. a673b.bigscoots-temp.com.