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Atlanta Fed’s Q1 GDP Forecast Is Almost as Laughable as the Fed Itself

Last Updated September 23, 2020 1:37 PM
Sam Bourgi
Last Updated September 23, 2020 1:37 PM
  • The Atlanta Fed’s GDP Tracker is projecting annual growth of 2.7% in the first quarter despite the onset of coronavirus.
  • If the forecast holds, it would mark the highest rate of expansion for the U.S. economy since Q1 2019.
  • Fed prognosticators are notoriously bad at predicting the future. Their glaring coronavirus omission is laughable.

The Bureau of Economic Analysis released its revised fourth-quarter GDP numbers Thursday. As expected, gross domestic product expanded at an annualized 2.1% pace between October and December.

It’s too bad nobody actually cares about what happened in Q4  now that coronavirus has become a global pandemic impacting everything from supply chains to manufacturing and up to consumer spending.

Yet, forecasters at the Atlanta Federal Reserve have adopted an eerily optimistic view of Q1 2020 – one that seems to short-change all the disruptions caused by the coronavirus. To be fair: Forecasters are still relying for the most part on January economic data. But analysts in the private sector have already clued in on the threat coronavirus poses to GDP growth and have revised their forecasts accordingly.

Atlanta Fed Keeps a Rosy Outlook

The Atlanta Fed’s latest estimate of first-quarter GDP  calls for annual growth of 2.7%, slightly higher than the previous estimate of 2.6%. The upgrade reflects an expected increase in “real gross private domestic investment growth.”

Over in the private sector, economists have already slashed their GDP estimates due to coronavirus. Much of that has to do with China’s economic lockdown, which will impact all of its major trading partners.

Goldman Sachs has reduced its already dismal first-quarter estimate for U.S. GDP growth down to 1.2% from 1.4% previously. The bank said (as per Market Insider ) that risks associated with cornavirus are,

… clearly skewed to the downside, with an increasing amount of companies suggesting potential production cuts should supply chain disruptions persist into Q2 or later.

Meanwhile, 60 economists polled by The Wall Street Journal expect the U.S. economy to grow 1.6% in the first quarter. That’s well below the seven-year average.

Wall Street Journal survey
U.S. economic growth is expected to fall below trend in the first quarter, according to a consensus forecast obtained by WSJ. | Chart: The Wall Street Journal 

Traders Are Betting the Atlanta Fed Is Wrong

The Atlanta Fed may be forecasting a solid start to 2020, but traders aren’t buying it.

That’s the general takeaway from the Fed Fund futures market, which shows rising expectations for an imminent rate cut.

Market participants bet on rate cuts when the economy is in decline or when key indicators such as inflation are falling below central-bank targets. At last check, traders were pricing in a 99.3% chance of an interest rate cut at the March Federal Open Market Committee (FOMC) meeting.

Fed Fund futures
Traders seem certain the Federal Reserve will cut interest rates following next month’s policy meeting. | Chart: CME Group 

Get this: Traders are betting money that the Fed will cut rates again in April (each cut coming in at 25 basis points):

Fed Fund futures
Back-to-back interest-rate cuts? Traders seem to think so. | Chart: CME Group 

That’s a staggering turn of events for the Fed, which has been trying to contain expectations for looser monetary policy while trying to convince us nothing is wrong with the repo market. (Someone at the Fed must know that monetary policy can never be normalized under the current regime because it would destroy the economy.)

Perhaps the strongest signal of an imminent recession comes from the bond market. An inversion in the yield curve, hastened by the collapse of interest rates to record lows, suggests a major downturn could be months away.

If coronavirus is the Black Swan event traders have been fearing since the last recession, it shouldn’t come as much of a surprise anymore. Even Jerome Powell, the Fed’s Chairman, acknowledged last month that the flu-like disease is likely to impact global economic growth.

The way things are going, coronavirus is probably a lot worse than initially feared. Its impact on China will have a cascading effect on global trade and commerce, rending central-bank policies effectively useless.

Someone at the Atlanta Fed should look into this before they mislead the public.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.