On February 1, the Atlanta Fed’s GDPNow model forecast 5.4% gross domestic product growth in the first quarter of 2018. Its latest estimate on February 6 downgraded the forecast to 4.0%.
Business Insider had written about the surprisingly aggressive earlier forecast,
FIGURE 1: EVOLUTION OF ATLANTA FED Q1 GDP FORECAST
What is driving this drop in the Atlanta Fed’s GDP forecast?
According to its release on Feb. 6, 2018,
Previously, the Atlanta Fed had been encouraged by recent data from the Institute of Supply Management (ISM) in forecasting real private fixed investment and consumer spending, along with construction spending released by the U.S. Census Bureau. While the ISM’s overall manufacturing index came in at 59.1 for January—slightly below December—it beat consensus forecasts and, Barron’s notes, “New orders just keep pouring in, with the reading of 65.4 in January the best in nearly 10 years.”
FIGURE 2: 3-YEAR TREND FOR ISM MANUFACTURING INDEX
Despite the market sell-off, many analysts believe that strong corporate earnings and continued positive trends in employment data and consumer spending will provide intermediate-term support for the equity market.
But was the Atlanta Fed’s earlier 5%-plus forecast realistic? And how has it done on “out-of-the-box” forecasts in the past?
As can be seen in Figure 3, the Atlanta Fed has, on average, done a decent job of forecasting Bureau of Economic Analysis (BEA) initial quarterly GDP estimates. However, the most recent example of the Atlanta Fed predicting 5%+ GDP growth (Q4 2011) was followed by an actual BEA first estimate of 2.75%—quite a miss for the forecast.
FIGURE 3: ATLANTA FED GDPNOW FINAL GDP FORECASTS VS. BEA INITIAL REPORT