First-Quarter Real GDP 0.7%; Spending Slowest Since 2009: Nowcast Model Needs Serious Work

By: Mike Shedlock | Fri, Apr 28, 2017
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First quarter real GDP came in at 0.7% vs an Econoday consensus estimate of 1.1%. Consumer spending was the weakest since the 4th quarter of 2009.

Highlights

The weakest showing since the last recession for consumer spending held down first-quarter GDP which could manage only a 0.7 percent rate of annualized growth. Consumer spending rose at only 0.3 percent which is by far the worst showing since no change in fourth-quarter 2009.

Weak vehicle sales are a major negative in the quarter's consumer breakdown, pulling durables down at a 2.5 percent rate and offsetting a 1.5 percent rise in non-durables and a slow 0.4 percent showing for services.

Weakness in consumer spending is strongly associated with recession but not other data in the report. At a 13.7 percent pace, residential investment posted a second straight very strong quarter. And in a rare show of strength, nonresidential investment, which has been subdued, jumped at a 9.4 percent rate with both structures and equipment showing unusual strength. A surge in mining investment is a standout of the report.

The net export gap narrowed slightly which was a small plus for the quarter while a drop in government purchases was a negative. A sizable negative for the quarter was a slowing in inventory build, pulling GDP down by 0.9 percentage points but also keeping in check what may be unwanted stock given the weakness in consumer spending. Looking at final demand, which excludes the inventory effect, final sales rose 1.6 percent which is an improvement from the fourth quarter's 1.1 percent.

This is a mixed report with the weakness in consumer spending not fitting with the strength in investment. Still, all the sky high confidence readings in the quarter did nothing to help actual spending. In other data, prices show pressure with the GDP price index at 2.3 percent for a 2 tenths gain and the core also at 2.3 percent for a 5 tenths gain.


BEA Release

Real GDP

Let's tune into the BEA News Release for more details.


Nowcast Model Needs Serious Work

The Federal Reserve Bank of New York needs to do some serious work on its model as I pointed out in advance. See Six GDP Estimates (Three Revised Today): ZeroHedge, Mish, GDPNow, Nowcast, ISM, Markit.


Model Flaws

  1. Nowcast uses no hard auto data: This is a serious error. Autos account for 20% of retail sales and fleet sales are also very important.
  2. Nowcast has an incorrect reliance on unemployment rate: People dropping out of the labor force and actual employment rising can both move the number in the same direction. Both things cannot mean the same thing.
  3. ISM vs PMI: Both reports measure the same thing, yet those reports signal very different things. At least one of them is wrong. GDPNow and Nowcast both rely on ISM even though the PMI reports have been more accurate, at least recently.
  4. The GDPNow and Nowcast models both suffer from an inability to think. The weather provides a nice example. In December, the weather was unusually cold, causing Industrial Production numbers to soar (heat and electric production), for the entire upcoming quarter. I estimated in advance, January would take away those numbers. My assertion played out, at least for GDPNow. I still cannot account for Nowcast.


Mish Estimate History


GDPNow Partial History vs Mish

GDPNow Partial History versus Mish
Larger Image


GDP Predictions

  1. GDPNow April 27: 0.2%
  2. Mish April 27: 0.4%
  3. ZeroHedge April 27: 0.4%
  4. Markit April 21: 1.7%
  5. FRBNY Nowcast April 21: 2.7%
  6. ISM April 3: 4.3%

The FRBNY Nowcast was heavily influenced by soft data including the ISM reports. The other major error was a complete omission of hard auto data.


Consumer Sentiment

Econoday and other sources keep touting strong consumer sentiment as if it means something. It's time to throw that idea in the ash can where it belongs.

  1. March 21: Consumer Sentiment Statistical Noise: Modern Day Snake Oil
  2. March 28: Consumer Confidence Strongest Since December 2000: A Strong Contrarian Indicator?
  3. April 13: Econoday Parrot Squawks Again after Sentiment Rebounds to 17-Year High

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Mike Shedlock

Author: Mike Shedlock

Mike Shedlock / Mish
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Mike Shedlock

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility.

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