No, the economy probably isn't in Q1 freefall
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President Trump's trade war and spending cuts are testing the economy's resiliency. But the economy probably isn't in the midst of the kind of steep contraction suggested by a closely followed model that has made headlines lately.
Why it matters: The trillion-dollar question this year is how slumping business and consumer confidence will translate into slower economic activity.
- While that might happen, most signs point to expansion still underway at the moment.
- But that's not the signal sent by the Atlanta Fed's GDPNow model, a "nowcast" that uses incoming data to estimate in real-time, current-quarter GDP growth.
- That model's estimate of first-quarter GDP growth has been in freefall. It now points to a 2.8% rate of Q1 contraction, compared to a 2.3% rate of growth just a week ago.
- But while risks abound, the situation is probably not as gloomy as the model implies.
The intrigue: Preliminary data that showed a historic surge in goods imports pushed GDPNow into negative territory. Businesses trying to get ahead of tariffs might have played a role in the import spike — but that would have been a one-off impact, not an ongoing hit to GDP growth.
- Moreover, a team of economists at Goldman Sachs say that it was driven by a flood of gold imports that are excluded from GDP "because they are generally not consumed or used in production."
- The bank believes the economy will grow at a 1.6% rate in the first quarter, lower than its initial forecast but well above what the Atlanta Fed is tracking.
The big picture: The exaggerated impact of trade and the whipsaw in growth estimates is a result of how GDPNow is calculated.
- It's a running estimate of the data released for January that factors into GDP, not a traditional forecast of how the entire quarter might shake out.
- With two more months' worth of data, first-quarter GDPNow is set to move around some more.
There is another reason to believe the downside risk from imports is exaggerated: The drag on GDP from imports will likely be offset by other categories as more data from the quarter is released.
- For instance, inventory stockpiles would be a boost to GDP. If the goods are sold within the quarter, that would translate into stronger consumption.
What they're saying: "None of these measurement issues are relevant to the question of how fast domestic economic activity is actually growing," Lou Crandall, chief economist at Wrightson ICAP, wrote in a note.
