GDPNow forecast dives on housing data, erasing a big jobs gain

Even if you believe in a big economic boost from the recent jobs report, housing just erased those gains.

GDPNow data from Atlanta Fed, chart by Mish

Please consider the August 16 update to the GDPNow Forecast for Q3 GDP.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 1.8 percent on August 16, down from 2.5 percent on August 10. After recent releases from the US Department of the Treasury's Bureau of the Fiscal Service, the US Bureau of Labor Statistics, the US Census Bureau, and the Federal Reserve Board of Governors, a decrease in the nowcast of third-quarter real gross private domestic investment growth from 0.2 percent to -3.6 percent was slightly offset by an increase in the nowcast of third-quarter real government spending growth from 1.7 percent to 2.0 percent.

Base Forecast vs Real Final Sales

The real final sales (RFS) number is the one to watch, not baseline GDP.

RFS ignores changes in inventories which net to zero over time. This is a good reason to ignore the talk of two quarters of declining GDP being a recession. 

RFS in the second quarter was positive. I stick with my assessment of a recession starting in May, assuming the upcoming data matches my forecasts. 

Retail sales plunged in May after a strong April, and that's when housing started to crumble as well.

Surprised by Today?

Neither the Fiscal Service Report (government spending), nor BLS report impacted the GDPNow estimate. 

Today we had two reports, one surprisingly good and the other surprisingly bad and that's what drove the model.

Industrial Production Surprisingly Good

Industrial production estimates and actuals from Bloomberg Econoday.

The Fed revised June up and July was a big surprise on top of that.

But surprise to whom?

It's not the data that matters to GDPNow but rather the economic report vs the model's expectation. 

The model was negatively surprised by the housing report, not positively surprised (enough to matter), by industrial production. 

GDPNow Jumps on Jobs Data 

On August 10, I commented GDPNow Third-Quarter Forecast Jumps to 2.5 Percent, Recession Off?

Models Don't Think

Models don't think. Humans can, perhaps incorrectly.

The baseline job numbers do not match 200,000 layoffs at Amazon, consumer sentiment, rising jobless claims (albeit from record low levels), warnings from retailers including Walmart and Target, layoffs at Walmart, and two warnings from Micron on demand for computer chips.

I smell huge revisions to the job numbers. If so, this forecast jump will be short lived.

There are three retail sales reports coming and a myriad of housing reports. Those will hold the key to the third quarter, not the July jobs report.

Housing Starts Drop 9.6 Percent, Now Below Pre-Pandemic Level, Led By Single Family

Earlier today I commented Housing Starts Drop 9.6 Percent, Now Below Pre-Pandemic Level, Led By Single Family

Economists are like a broken record, continually overestimating demand for housing. Starts badly missed economists' expectations as did builder sentiment yesterday.

NAHB Sentiment Declines Eighth Consecutive Month Into Negative Territory

Yesterday, I noted NAHB Sentiment Declines Eighth Consecutive Month Into Negative Territory

For whatever reason the GDPNow model did not see this huge decline coming. It wiped out gains from the jobs report, even if that data is not revised. 

And if it is revised lower or retail sales disappoint, expect another plunge in these forecast estimates.

I stick with my assessment of weak housing and weak retail sales, on average, for Q3. If so we will have a third quarter of negative GDP. 

Jobs are a mirage, sort of. I actually expect them to be relatively strong this recession. For discussion, please see Expect a Long But Shallow Recession With Minimal Job Losses

By long I do not necessarily mean continually. Rather I foresee economic weakness and flirting in or near recession for over a year.