And It Came to Pass: An Accurate GDP Forecast

J: We warned you that a lousy GDP report was coming, and sure enough, the BEA gave it to us on April 28. They reported that real GDP in the first quarter of 2017 rose at a puny 0.7 percent at a seasonally adjusted annual rate from the fourth quarter of 2016.

Real GDP in the first quarter was reported at a record $16,842.4 billion at a seasonally adjusted annual rate (SAAR). That was up 1.9 percent from a year earlier, very close to the 2.0 percent year-over-year change reported for the fourth quarter of 2016.

L: Real vs nominal: No, there is no unreal GDP. Economists use the word "real" to indicate that the numbers are adjusted for inflation. When the numbers are not adjusted for inflation, they use the word "nominal."

J: Real final sales rose at a SAAR of 1.6 percent in the first quarter, a nice increase from 1.1 percent in the fourth quarter. That shows a big swing in the rate of change in private inventories. That inventory change added 1.01 percentage points to the 2.1 percent at a SAAR of growth in the fourth quarter of 2016, but it subtracted 0.93 percentage points from growth in the first quarter.

The biggest shift was in real personal consumption expenditures (PCE), which added a whopping 2.40 percentage points to real GDP growth in the fourth quarter of 2016. Real PCE growth only contributed 0.23 percentage points in the first quarter of 2017.

L: That was a lot of shopping by consumers at the end of 2016. They were probably too tired to keep going in the first quarter.

J: Real PCE rose at a SAAR of 3.5 percent in the fourth quarter of 2016, but only 0.3 percent in the first quarter of 2017. Given that we have record levels of employment, disposable personal income and wealth, virtually all forecasters expect a strong pickup in consumer spending and real GDP growth both this quarter and all the rest of 2017.

The impact of the weak first quarter on my forecast for the year is huge. On a year-over-year average basis, it reduces my forecast from 3.3 percent for 2017 to 2.6 percent. On a fourth quarter-to-fourth quarter basis, my old 4.0 percent prediction is now only 3.3 percent. That is a very good example of how sensitive economics forecasts are to the "jumping off" points.

L: Jim gave a talk in Asheville this past week with David Berson, Senior VP and Chief Economist for Nationwide. During the talk the guys addressed this weak GDP number, noting that for the past 10 years, the first quarter GDP number has often been low compared to the rest of the year. No one knows why, although David noted that it's possible that there may be something wrong with the seasonal adjustment of that quarter. Let's just say that a regularity like that begs for an explanation.