Economy | timiacono.com - Part 5

Atlanta Fed’s GDPNow Nails Q1 GDP

A screenshot of first quarter U.S. economic growth was quickly grabbed from the Atlanta Fed’s GDPNow page as they will soon switch over to estimating economic activity for the second quarter, but they really did a bang-up job for the first three months of the year.

They’ve had the Q1 GDP growth rate at about 0.25 percent for some time now as analysts have repeatedly revised their forecasts lower.  The government said today that their first estimate of first quarter growth is 0.2 percent, far below analysts’ estimate of 1.0 percent.

Market reaction to this news along with whatever it is Federal Reserve officials have to say at the conclusion of their policy meeting today should be fun to watch, the operative question being whether “bad news is still good news” for stock prices.

Real Fed Funds Rates Since 1971

As Federal Reserve officials (i.e., the most powerful group of unelected policy makers in the world) gather to discuss if and when they should raise short-term interest rates, it’s worth reviewing how we got here from the perspective of real interest rates.

Since this chart hadn’t been updated since Ms. Yellen took over at the Fed and the official measure of inflation reached its lowest level since the 1950s (save for a few months in 2009 during the financal crisis),  a slight uptick in real rates was expected.

The 0.11 percent Fed funds rate and current annual inflation of -0.1 percent have combined to push real interest rates back into positive territory for the first time in five years.

Paraphrasing Bill Murray in Caddyshack, “So, we got that going for us, which is nice”.

Economic Surprise

Indicators like Bloomberg’s Economic Surprise Index are much like economists who, it is sometimes said, have predicted eleven of the last two recessions (or something like that).

Nonetheless, it’s worth noting that the recent string of disappointments have exceeded the level of the many false positives (or, in this case, false negatives) since the recession.

Of course, all other sharp downturns in the index have proven to be cases of “bad news is good news for stocks”, a meme that will, perhaps, be tested this time around.

A Stinker of a Jobs Report

It’s probably a good thing that financial markets are closed today in observance of the Good Friday holiday as today’s big jobs report miss would no doubt have sent traders into a frenzy of some sort, direction of markets unknown. Now they’ll have the long Easter weekend to think about the implications of the data shown below via this story at CNN/Money.

In addition to falling well short of the consensus estimate of nearly a quarter million new jobs, prior months’ labor market gains were revised downward by 69,000. Also, it’s important to remember employment is a lagging indicator that, now, may be confirming what many other indicators are pointing to – sharply slower growth for the U.S. economy.

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A Dearth of First Quarter Economic Growth

As was the case a year ago when harsh winter weather visited the East Coast, the first quarter of 2015 is turning out to be something of a bust GDP growth-wise as evidenced by the Atlanta Federal Reserve’s GDPNow forecast shown below.

Bolstering the argument that this was a weather-related slowdown, about a quarter of the recent decline can be attributed to shrinking fixed investment in structures by businesses (though, countering that argument is the lack of a similar decline in residential building).

A widening trade gap accounts for another quarter of the drop but, despite the conventional wisdom of the impact of sharply lower energy prices, it was consumption – America’s growth engine – that accounted for about half of the overall decline since this data series began in January,  all of which suggests the growth slowdown may not be a transitory.

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