April 28, 2020

US GDP growth – One extreme to another

BY Olivier Desbarres

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The BEA will release tomorrow its first estimate of US GDP growth in Q1.

Consensus estimate for the quarter-on-quarter seasonally-adjusted annualised rate of growth is -4.0%. If correct this would imply that growth in Q3 and Q4 2019 was effectively wiped out and that GDP in Q1 2020 shrank by annualised $200bn.

The estimates span from -0.3% to -10% – an unprecedented range for a first estimate of US GDP of almost ten percentage points.

4X Global Research’s analysis suggests that US GDP growth in Q1 was close to the Atlanta and New York Fed estimates of about -0.3%.

The most pessimistic estimate implies that growth suffered its greatest quarterly contraction since Q1 1958. Even the most optimistic estimate would represent the first quarterly contraction in six years and bring to an end the record-low volatility in US GDP growth recorded in recent years.

While Q1 GDP data are now considered “old”, upon their release financial markets could be jittery, even if temporarily, if US growth is at the low or high end of this range of estimates.

There’s an even greater dispersion of forecasts for Q2. At one extreme the New York Fed forecasts that GDP contracted “only” 7.8%. At the other extreme a number of major investment banks as well as the Congressional Budget Office forecast that the US economy will contract a record 40%.

Assuming GDP contractions of 4% in Q1 and 35% in Q2, we estimate that real US GDP would be lower than in Q4 2019 by an annualised $1.86 trn – roughly equivalent to the annualised GDP of the state of Texas, the second largest US state as measured by GDP.

The divergence in forecasts for Q3 GDP growth is also great but the consensus forecast is that it will be positive, with a number of investment banks forecasting double-digit growth. The broad assumption is that US social distancing measures will be eased in coming months but in all likelihood these forecasts will be revised again between now and October.

All eyes on release tomorrow of first estimate of US GDP growth in Q1 2020

The US Bureau of Economic Analysis (BEA) will publish tomorrow (29th April), at 08.30 New York time (13.30 London time) its first estimate of US GDP growth for Q1 2020 along with detailed data of the demand-side drivers of growth. This first estimate is based on source data that are incomplete or subject to further revisions. The second estimate, based on more complete data, will be released on 28th May, with the third and final estimate scheduled for release on 25th June.

The consensus estimate for the quarter-on-quarter seasonally-adjusted annualised rate (saar) of US GDP growth in Q1 is -4.0%. If correct this would imply that growth in Q3 and Q4 2019 (2.1% qoq each) was effectively wiped out and that GDP (in constant terms) in Q1 2020 shrank by annualised $200bn according to our estimates. Notably the estimates span from -0.3% to -10% (see Figure 1) – an unprecedented range for a first estimate of US GDP of almost ten percentage points. The most pessimistic estimate would imply that growth suffered its greatest quarterly contraction since Q1 1958 while even the most optimistic estimate would represent the first quarterly contraction in six years.

US GDP growth – One extreme to another 7

  • Atlanta Fed GDPNow tracker, updated on 24th April, estimates US GDP contracted 0.3% qoq in Q1 (the Atlanta Fed will publish its final estimate today). 1
  • New York Fed Nowcast, also updated on 24th April, estimates US GDP contracted by a similar 0.4% qoq.2
  • US Conference Board estimates a 5.8% contraction (its latest update was on 9th April);
  • Estimates by major investment banks range from -0.5% to -10%.

4X Global Research’s simple analysis suggests that US GDP growth in Q1 was close to the Atlanta and New York Fed estimates.

US GDP growth – One extreme to another 8

1 The Atlanta GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available data for the current measured quarter. There are no subjective adjustments made to GDPNow –the estimate is based solely on the mathematical results of the model.

2 The New York Fed Staff Nowcast is a purely statistical model. It uses historical relationships to estimate the implication of macroeconomic data, as they are released, for current and next quarter GDP growth. The model does not incorporate information from data at higher frequency than monthly (so no data for March are incorporated until early April, for example) and therefore adjusts only gradually to rapidly evolving economic conditions.

  • Based on the positive historical relationship between our measure of the composite ISM PMI – a weighted average of the manufacturing PMI and non-manufacturing PMI – and US GDP growth we estimate that the latter stood at 1.7% year-on-year (yoy) in Q1 2020 or a quarter-on-quarter saar of +0.5% (see Figure 2).

US GDP growth – One extreme to another 9

  • Based on the positive historical relationship between US manufacturing output growth and US GDP growth we estimate that the latter stood at 1.0% yoy in Q1 2020 or a quarter-on-quarter saar of -2.0% (see Figure 3).

Wide range of estimates for Q1 following years of steady US GDP growth

This estimate range of almost ten percentage points is remarkable for a number of reasons.

First most weekly and monthly US macro data for January-March, which underpin headline GDP growth, have already been released (personal income and spending figures for March, due out on 30th March, are the notable exception).

Second, even if GDP growth in Q1 is at the upper end of the range of estimates (i.e. -0.3%), this would still bring to an end the record-low volatility in US GDP growth recorded in recent years. Figure 4 shows that in the 16 quarters to Q4 2019, the difference between the minimum and maximum rates of US GDP growth was only 2.4 percentage points (the low was 1.1% in Q4 2018 and the high was 3.5% in both Q4 2017 and Q2 2018). This gap was the smallest in the past 70 years, according to our estimates.

US GDP growth – One extreme to another 10

 

By definition many analysts will be proven wrong and while GDP data for Q1 can now be considered “old”, upon their release on 29th April financial markets could be jittery, even if temporarily, if US GDP growth is at the low or high end of this wide range of estimates.

Historical contraction in GDP in Q2 expected, followed by recovery in Q3

With institutions and analysts divided over the rate of GDP growth in Q1 it is unsurprising that there is an even greater dispersion of forecasts for Q2 (see Figure 5). At one extreme the New York Fed forecasts that GDP contracted “only” 7.8%. At the other extreme a number of major investment banks as well as the Congressional Budget Office forecast that the US economy will contract about 40% (in real terms) in Q2.

US GDP growth – One extreme to another 11

Nevertheless most analysts are forecasting by far the sharpest contraction in quarterly US growth since the end of World War Two. A 40% contraction in real GDP would be four times greater than the record- contraction of 10.4% registered in Q1 1958 (see Figure 6) and even the New York Fed’s more “optimistic” forecast of -7.8% in Q2 would be the sharpest contraction since the height of the Great Financial crisis (-8.7% in Q4 2008).

Assuming GDP contractions of 4% in Q1 and 35% in Q2, we estimate that US GDP (in constant prices) would be lower than in Q4 2019 by an annualised $1.86 trn. To put this context this would be roughly equivalent to the annualised GDP of the state of Texas, the second largest US state as measured by GDP according to the BEA.

US GDP growth – One extreme to another 12

The divergence in forecasts for Q3 GDP growth is also great but the consensus forecast is that it will be positive on the broad assumption that US social distancing measures are eased in coming months and that (at least) some companies re-open and Americans gradually return to work.

  • The US Conference Board has one of the most pessimistic outlooks, forecasting GDP growth of only +0.1% in Q3 (and +27.4% in Q4). Its core scenario of a U-shaped recovery in the output level (not growth) assumes that “social distancing measures are executed in a balanced fashion that prioritize protecting people’s health and wellbeing while simultaneously gradually rebooting the economy” and therefore that the “recovery will be slower but more controlled than in the V- and W- shaped scenarios, giving businesses more time to prepare for the recovery”.

 

  • UBS forecasts GDP growth of only 2.0% in Q3.

 

  • However, Credit Suisse, Goldman Sachs, JP Morgan and Morgan Stanley all forecast double-digit growth rates – albeit from very depressed levels.

Bearing in mind that Q3 GDP will incorporate macro data for September, some of which will not be released until end-October (i.e. six months from now) it is very likely that these forecasts will be revised, and probably many times over, between now and then. For now and probably the next 48 hours the focus is likely to be squarely on GDP data for the first quarter of the year.

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