Despite Strong Spending in October, GDPNow Forecast Took a Dive, Why? – Mish Talk

Chart Notes

• The blue line is the base forecast. It is about all the public sees or hears about when the BEA releases its GDP report but it is not what matters most.
• The red line is Real Final Sales (RFS). That is the bottom line estimate for the economy and what does matter most. 
• The yellow line is RFS to domestic buyers, the rest is exports.
• The green line is RFS to private domestic buyers. It excludes government and exports.

Real Final Sales is the true bottom line performance for the quarter. The difference between the baseline report and RFS is inventories which net to zero over time. 

Mainstream media follows the baseline number, not what matters most. 

GDPNow Current Estimate

Please consider the December 1 update to the GDPNow Forecast for 2022 Q4 GDP.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 is 2.8 percent on December 1, down from 4.3 percent on November 23. After recent releases from the US Census Bureau, the US Bureau of Economic Analysis, and the Institute for Supply Management, a decrease in the nowcast of fourth-quarter real personal consumption expenditures growth from 4.8 percent to 3.2 percent was slightly offset by an increase in the nowcast of fourth-quarter gross private domestic investment growth from 1.0 percent to 2.0 percent. In addition, the nowcast of the contribution of the change in real net exports to fourth-quarter real GDP growth decreased from 0.64 percentage points to 0.16 percentage points.

Spotlight on Current Numbers

• Base Number: 2.8 Percent
• RFS: 2.4 Percent
• RFS Domestic: 2.1 Percent
• RFS Private Domestic: 2.4 Percent

Real Income and Spending Surge in October 

I will do a closer look at income and spending but it is the month-over-month changes that drive the GDPNow forecast.

Real Personal Consumption expenditures jumped a whopping 0.5 percent in October. Real means inflation-adjusted. Nominal spending rose 0.8 percent with inflation eating 0.3 percentage point.

Yet, the GDPNow forecast took a dive on strong spending August and October but soared in September. 

August and September were for Q3 but here are the internal details for the GDPNow report on December 1 (lead chart). 

Major GDPNow Releases for 2022 Q4

Major Contribution to GDP Changes

• PCE: From 3.29 to 2.18
• Equipment: From 0.46 to 0.74
• Nonresidential Structures: From 0.02 to -0.13
• Residential Structures: From -0.87 to -1.01

The GDPNow report followed the ISM release, advance economic indicators, and personal Income reports. 

Advance Trade Data 

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Please consider the Monthly Advance Trade Data from the Commerce department. 

Advance Trade Details

• The international trade deficit was $99.0 billion in October, up $7.1 billion from $91.9 billion in September. 
• Exports of goods for October were $173.7 billion, $4.7 billion less than September exports.
• Imports of goods for October were $272.7 billion, $2.4 billion more than September imports.
• Exports fell 2.6 percent and imports rose 0.9%.

A similar setup happened in August. But in September (yellow highlight in the real income and spending chart), imports fell and exports rose. 

Consumers spent more but on imports. 

However, it’s not the data that matters but what the model expected that matters. The GDPNow model did not anticipate this trade reversal.

Residential Investment

On November 23, the GDP Now Forecast for Residential Investment fell from -0.59 to -0.88 and has continued to dive for obvious reasons. It’s now -1.01.

Curiously, despite the alleged bounce in new home sales on November 23, the GDPNow model went the other way. 

The model expected more or the negative revisions mattered more. Regardless, I highly doubt there was much of a bounce. 

Cancellations are running about 25 percent and the Census Department does not factor cancellations into its data. The margin of error on the housing reports is enormous.

New Home Sales

• Sales of new single‐family houses in October 2022 were at a seasonally adjusted annual rate of 632,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.
• This is 7.5 percent (±20.8 percent)* above the revised September rate of 588,000, but is 5.8 percent (±19.6 percent)* below the October 2021 estimate of 671,000.
• In September I reported New Home Sales Jump an Astonishing 28 Percent in August to 685,000. But today we see the number is 661,000.
• This month the Census Department revised September from 603,000 to 588,000.

Notice the margin of errors in these reports ±20 percent!

The Census Department does not have much faith in its estimates and neither do I. 

See links above for more details and discussion.

This post originated at MishTalk.Com.

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