With Q4 GDP on the economic calendar for Friday, today we want to take a last look at what two regional Federal Reserve models have to say on the topic. Both the New York and Atlanta Feds run algorithmic analyses that estimate economic activity rather than the old-school approach of using human economists. It is a novel approach, and not without its pitfalls, but the math behind the models is solid and they provide a useful take on this important number.
Three points here:
#1. The Wall Street consensus for Q4 GDP sits at 2.9%, with a spread of 2.2% to 3.3%.
#2. The Atlanta Fed model is higher, at 3.4%.
This model was actually in line with the human economists at 2.8% as recently as January 11th. But since the algorithm refreshes with new data, the CPI/Retail sales release on January 12th took the estimate to 3.3%. Subsequent information on Industrial Production (January 17th) and Housing Starts (January 18th) bumped that to the current 3.4% estimate.
#3. The New York Fed Staff Nowcast is higher still, at 3.9%.
Their model was forecasting 3.2% back in mid-November, but strength in Industrial Production, Building Permits and Housing Starts took it to 3.8% the week of November 18th. It has not moved much since.
The upshot here is that if the Fed models are more correct than the human economists, the surprise versus consensus will likely come from both consumer and business spending. Given how equities have performed in anticipation of Q4 earnings, that makes sense to us. The sell off in US Treasuries points to the same conclusion – a strong GDP print is just one more solid argument for the Federal Reserve to keep to its current outlook of 3 rate hikes in 2018.
The $64 Question: will US equities rally on a stronger than expected GDP print? Ordinarily, we would say “No”. Stocks discount corporate earnings, and with a 10% expected growth rate for Q4, a GDP “Surprise” should be no surprise at all. Still, we are working with a market that seems to embrace every good headline. There is every chance they buy this one as well.
Atlanta Fed GDPNow: https://www.frbatlanta.org/cqer/research/gdpnow.aspx
New York Fed Nowcasting Website: https://www.newyorkfed.org/research/policy/nowcast