A Precarious Optimism For Q3 GDP

Worries about a new recession have been on a roll over the past month, but some forecasters are having second thoughts. “The U.S. economy probably grew in the third quarter at the fastest pace this year, easing anxiety that the recovery was on the verge of stalling, economists said before a report this week.” Bloomberg reports. “Gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate after advancing 1.3 percent in the previous three months, according to the median forecast of 68 economists surveyed by Bloomberg News before the Commerce Department’s Oct. 27 release. Orders for business equipment rose in September and new-home sales stabilized, other data may show.”

David Altig and Patrick Higgins at the Atlanta Fed note that recent surprises in the economic news have turned to the positive:

One aspect of this analysis is called a ‘nowcasting’ exercise that generates quarterly GDP estimates in real time. The technical details of this exercise are described here, but the idea is fairly simple. We use incoming data on 100-plus economic series to forecast 17 components of GDP for the current quarter. Those forecasts of GDP components are then aggregated to get a current-quarter estimate of overall GDP growth.

The outcomes of this exercise have been as positive in the third quarter as they were negative for the first two quarters of the year.

A bit of statistical corroboration for the modest improvement can be found in the latest data points of the Aruoba-Diebold-Scotti Business Conditions Index. This benchmark, which is “designed to track real business conditions at high frequency,” has been recovering lately, albeit slowly and from a low level.
The main focus for economic news this week is on third-quarter GDP, which is scheduled for release on Thursday. The consensus forecast is calling for a 2.2% annualized real growth rate, according to Briefing.com. Marketwatch’s polling of economists looks even better, projecting a 2.8% rise for the economy in Q3. By comparison, Q2’s GDP rose a meek 1.3%.
But the modest revival in expectations may be hanging on a thread. The fear of blowback from Europe and the Continent’s highwire act with the euro crisis looms large over any confidence that the near term offers smooth sailing for keeping growth alive.
Meanwhile, the recession call by the respected Economic Cycle Research Institute (ECRI) is still rattling the optimists. As Doug Short noted last week, ECRI’s leading index has been falling since early August.
The week ahead may tell us if that pessimism is warranted or not. In addition to Q3 GDP, Wednesday brings news of the latest on new orders for durable goods, followed by Friday’s update on personal income and spending. Economists generally see modest growth for these numbers as well, but forecasts count for even less than usual these days.