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3rd Quarter GDP: October Surprise? Which Way?

The consensus 3rd quarter GDP estimates show U.S. economic growth may accelerate just before election day.

This prompted the Wall Street Journal to ponder the October Surprise?

But how can stronger growth be a surprise, if that is precisely what most economist expects?

October Surprise


October Surprise?

"Less than two weeks before Election Day, American voters could learn that economic growth has suddenly accelerated to its fastest pace in two years."


Forecasts

  • A of Friday, forecasting firm Macroeconomic Advisers projected a 3.1% seasonally adjusted annual growth rate for GDP in the third quarter.

  • The Federal Reserve Bank of Atlanta's GDPNow model on Thursday predicted a 3% growth rate.

  • Oxford Economics on Friday also estimated the third quarter's growth rate at 3%.

  • Barclays on Friday predicted third-quarter growth at a more modest 2.6% pace.


FRNBY Nowcast

The Wall Street Journal left off the FRNBY Nowcast that stood at 2.8% and 1.7% for 2016:Q3 and 2016:Q4, respectively.

The date on those forecasts is September 9.

The New York Fed is currently in a blackout period because of the Fed FOMC interest rate decision on Wednesday, September 21.


Trend is Lower

GDPNow

The third quarter GDPNow forecast is 3.0 percent as of September 15, 2016. It has been trending lower. The "Blue Chip" economists forecast has been trending higher.


Inventory Build

The Journal article states "Many economists are predicting the report will show a pickup in growth after three straight quarters of lackluster expansion, fueled by decent-if-not-great consumer spending and the end of a five-quarter drag from lackluster business inventories."

I question that thesis and the following chart shows why.


Inventory-to-Sales

Inventory to Sales ratio 2007-2016

Mish Tweet

An inventory build could happen, but the inventory-to-sales numbers do not support the idea.

For more details, please see Wholesale Sales Drop 0.4%; Inventory-to-Sales Ratio Back on the Rise.


Guess of the Next Nowcast Guess

Based on recent data, my guess of the next FRBNY Nowcast guess is 2.4% for third quarter and 1.4% for 4th quarter. We will find out this Friday.

On Oct. 28, 11 days before the Nov. 8 presidential election, the Commerce Department's publishes its first (advance) estimate of gross domestic product for the 3rd quarter.

Meanwhile there's 39 days for economists to change their minds as to what will constitute a "surprise".

As it stands now, 2.8% to 3.0% is a consensus estimate, not a surprise.


Downward Surprise?

By definition, surprises have to be what most don't expect.

I suspect 3rd quarter GDP will be closer to 2.0% than 3.0%. I will make a comparatively shocking prediction of 1.8%, subject to revision between now and the final guess everyone gets to make.

There's still five weeks of economic data yet to come in.

If the inventory build occurs that economists expect, it will be at the expense of 4th quarter GDP.

No miracles are to be found in Janet Yellen's hat.


Related Economic Reports

 

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