Aug 17, 2023 - Economy

Wall Street is hiking forecasts for economic growth

crystal ball with graph arrow going up and then down

Illustration: Lazaro Gamio/Axios

Gloomy warnings about an imminent recession have given way to calls that the economy is now facing the opposite: accelerating conditions.

Why it matters: Recent data largely points to an economy that began the third quarter in far better shape than many anticipated.

  • The result: Early gross domestic product estimates, which some Wall Street economists are revising up, would suggest the economy is revving up — not slowing down.

Driving the news: An economic growth forecast compiled by economists at the Atlanta Fed says third-quarter GDP growth will be 5.8% — an eye-popping figure that has economists buzzing.

Yes, but: There are plenty of reasons to be skeptical. The so-called GDPNow forecast is a running estimate based solely on available economic data. It swings around as more data points come in.

  • It's early days: Q3 is still underway, with plenty more economic releases to come that could influence the outlook.
  • Put simply, "[a]s more monthly source data becomes available, the GDPNow forecast for a particular quarter evolves and generally becomes more accurate," the Atlanta Fed website says.

Between the lines: Think of it like a weather forecast, Atlanta Fed economist Patrick Higgins tells Axios. "You're obviously going to have a better forecast for the weather tomorrow than three months from now."

  • Higgins says the final GDPNow estimate ultimately tends to be around 0.8 percentage points above or below the official GDP figure released by the government.
  • "We're a long way out from that. Right now, it's probably not that accurate," Higgins says.

Still, the run of surprisingly good data that has pushed up GDPNow is also pushing some on Wall Street to upwardly adjust their estimates — even if they remain well below that of the Atlanta Fed's GDPNow.

  • Goldman Sachs, for instance, said it now expects the economy would grow at a 2.2% seasonally adjusted annual rate, up from the 1.5% it previously expected.

The big picture: Any pickup in economic activity would run counter to the Fed's goals. In an effort to slow inflation, policymakers have cranked up interest rates to slow the economy down.

  • But the strong data has (so far) been accompanied by cooling price pressures, buffering hopes that the economy may not need a downturn to cure the nation's inflation woes.
  • "As long as inflation is coming down, it's fine — their goal shouldn't be lowering growth for the sake of lowering growth," says former Council of Economic Advisers chair Jason Furman.
  • "That said, if there is still any sort of inflation problem, this pace of growth gives them a lot of room to raise rates more without worrying about the macroeconomy — although they still might have to worry about financial stability," Furman adds. (Of note: Furman says the GDPNow forecasts at this point in the quarter are usually biased upward by about 1 percentage point.)

The bottom line: Recent data has "reaffirmed our call for strong third-quarter economic growth, not only fueled by low inflation but also robust spending and output performances," Tuan Nguyen, an economist at consulting firm RSM US, wrote Wednesday.

  • "However, it remains to be seen if such economic strength can continue," Nguyen wrote, warning about "a host of headwinds, such as tighter credit standards, lower savings levels and the lag impact of elevated interest rates, begin to show full impacts."
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