GDP Apocalypse Now
Do you want to follow how often the U.S. economy fails to live up to expectations? Well … there’s an app for that.
This particular app wasn’t designed to give you such insight; it was simply designed to show you the current forecast for U.S. gross domestic product (GDP) growth.
But considering the way it has had expectations plunge quarter after quarter, it turns out to be an app that tracks the U.S. failure to meet expectations.
And by tracking it, it tells you everything you need to know about our current economic situation…
I’m talking about the Atlanta Federal Reserve Bank and its GDPNow forecast — and how it means we’re nowhere near a recovery.
The early third-quarter GDP estimate is set to arrive on October 28. Expectations are currently for growth of 2.1%, which doesn’t sound too bad on the surface.
But when you look at it in context, it’s horrible.
The Atlanta Federal Reserve Bank started its third-quarter forecast at 3.6%, which then steadily rose to 3.7% before coming back to reality. On top of that, the average estimate from mainstream economists was initially at 2.8%, with a low of 2.25% … so we are below all those estimates at the moment.
This trend of lowering expectations as the quarter progresses is nothing new, which is why I know the Federal Reserve is in no position to raise rates anytime soon, and your need for yield remains even more important today.
The Fed Getting Ahead of Itself
The Atlanta Fed likes to give a reading of U.S. GDP growth before the official estimate is released, using the same data that the actual GDP measure takes into account — which makes its forecasts extremely accurate.
For the past year or so, the GDPNow forecast has been slashing the majority of its GDP estimates as the U.S. economy continues to disappoint.
And this past Thursday, estimates were slashed again.
The Atlanta Fed dropped its estimate for third-quarter GDP growth two full basis points to 2.1%.
We can’t say it enough: This is not a recovery.
The continued trend lower and failure to meet expectations is the proof in the pudding.
For example, expectations for last year’s fourth-quarter growth were high. The Atlanta Fed expected a robust 2.6% growth rate — however, it later adjusted that to just 0.7%. It would later revise and seasonally adjust that number to 1.4% — but that’s still a whopping 1.2% below the initial 2.6% growth expectation.
Here’s a chart for fourth-quarter growth expectations to really see how big of a drop that was:
Then, in the projections for the first quarter of 2016, we saw a very similar pattern. Expectations started high, 1.2% initially, before rising to more than 2.5% … only to end at just 0.6%, two whole percentage points lower than the highest estimate.
That’s a significant shift and represents yet another disappointingly slow quarter for the U.S. Take a look at the chart below to see what I mean.
We saw the same exact trend in the second quarter of this year, where early expectations had growth around 3%. In just two short months, expectations plunged to 1.8%. Here’s the chart for the second quarter:
If that wasn’t enough, now we have a fourth straight quarter where estimates were overly optimistic. As I mentioned above, the GDPNow forecast was downgraded to 2.1% this week — a steep drop from expectations of 3.7% just two months ago.
Here’s a chart of the drop over the past couple of days:
Clearly there is a trend here — the U.S. economy is steadily weakening.
The actual GDP reports from the Commerce Department support this conclusion. When you add it up, you get a U.S. economy that has grown just 1.45% in 2016, and less than 1.6% over the past year — well below optimal U.S. growth rates that should easily top 2% and likely push 3%.
The bottom line is that our economy is simply not as healthy as it is portrayed by the Fed, by politicians and even by the current stock market rally. It means U.S. stocks are overvalued and due for a fall; it means that the Fed can’t possibly raise rates anytime soon; and it means that savvy investors should be grabbing holdings that will generate steady and stable income regardless of the market environment.
Editor, Pure Income