Atlanta Fed Slashes Q4 GDP Outlook by 33%
The Federal Reserve Bank of Atlanta (the Atlanta Fed) giveth and taketh away. In less than a week, the Atlanta Fed has slashed its U.S. economic outlook in the fourth quarter from 3.6% to 2.4%. That represents a whopping decrease of 33%. (Source: “GDPNow,” Federal Reserve Bank of Atlanta, November 30, 2016.)
On November 23, the Atlanta Fed was a little more upbeat, and said that the U.S. economy was on track to grow at a 3.6% annualized pace in the fourth quarter. This was unchanged from the 3.6% growth rate calculated on November 17.
The Atlanta Fed revised its fourth-quarter gross domestic product (GDP) guidance lower due to weaker-than-expected data on trade, inventory, and consumer spending. The Atlanta Fed forecast showed that net exports and inventory investment to fourth-quarter GDP dropped to 0.18 of a percentage point from 0.61 of a percentage point following the November 25 advance inventory and trade data for October.
The Atlanta Fed’s forecast on fourth-quarter consumer spending fell to 2.2% from 3.0% after the Commerce Department said that October consumer spending, which accounts for approximately 70% of U.S. economic activity, increased just 0.3%, which is less than the 0.5% increase forecasted by analysts. This is disappointing when you consider that September’s GDP reading was upwardly revised to 0.7% from 0.5%. (Source: “Personal Income and Outlays, October 2016,” Bureau of Economic Analysis, November 30, 2016.)
Third-Quarter GDP Numbers Not What They Seem
The downward revision in fourth-quarter GDP from the Atlanta Fed comes a day after the Department of Commerce said that the U.S. economy grew faster than expected, advancing at an annualized rate of 3.2%. (Source: “Gross Domestic Product Third Quarter 2016 (Second estimate),” Bureau of Economic Analysis, November 29, 2016.)
This represents the best performance in two years, but the 3.2% GDP growth rate is not exactly as it seems. The acceleration was due, in large part, to an increase in exports of soybeans. In fact, net exports were revised upward and added 0.87% to third-quarter GDP, which was the highest figure in three years.
The surge in exports was largely a result of a spike in soybean exports after a poor harvest in Argentina and Brazil, the two largest soybean exporters. The pickup in exports will most likely be temporary, since the harvest in Argentina and Brazil will rebound.
Consumers Not Ready to Support U.S. Economy
Strong GDP growth, which has been stagnating near two percent since 2007, can only really advance if consumer spending is resilient. Despite what the mainstream media tells you, consumers are simply not in a good position to lead the charge.
That’s going to be tough to do with the low-paying leisure and hospitality jobs still one of the top areas of growth. Moreover, the underemployment rate is still high at 9.5%. Debt levels may not be as high as they were in the depth of the 2008 financial crisis, but debt levels are still high.
Third-quarter household debt grew 0.5% from the second quarter to $12.35 trillion. This is 2.6% below its third-quarter 2008 peak of $12.68 trillion, but is 10.7% above the second-quarter 2013 trough. (Source: “Quarterly Report On Household Debt and Credit,” Federal Reserve Bank of New York, last accessed November 30, 2016.)
Financially stretched Americans are feeling the pinch. Overall delinquency rates were up in the third quarter. As of September 30, 4.9% of outstanding debt was in some stage of delinquency. Of the $609.0 billion in debt that is delinquent, $400.0 million is seriously delinquent (at least 90 days late). This is not totally surprising, when you consider that more than half of the country is living paycheck-to-paycheck.
The advanced third-quarter GDP numbers seem decent on the surface. But there’s much more to the numbers than meets the eye. Despite the euphoria surrounding Donald Trump, chances are good that U.S. GDP numbers will reverse in the coming quarters.
It’s not a good idea to hang the strength of the U.S. economy on one decent estimate. While third-quarter estimates are encouraging, it’s important to remember that first-quarter real GDP was just 0.8% and second-quarter real GDP was 1.4%.