The Great Economic Forecasting Divide: Macro vs. Markets

If the Atlanta Fed’s GDP nowcast for US economic activity in the first quarter is accurate, the macro trend is accelerating in the new year after a weak Q4. If the GDPNow model’s prediction holds, we’ll also have confirmation that Mr. Market laid an egg with his recent recession warning.

The Atlanta Fed’s Feb. 12 projection for Q1 GDP growth ticked higher, touching 2.7% (seasonally adjusted annual rate) after factoring in Friday’s upbeat news about retail spending in January. If the revised estimate is true, US economic output is on track to post a solid rebound after the tepid 0.7% increase in last year’s Q4.


It’s striking to see that the GDPNow model is anticipating a stronger pace of growth vs. the Blue Chip Consensus outlook, which reflects the combined forecasts of dozens of economists. Based on recent history over the past year or so, the Atlanta Fed’s outlook has typically been below the crowd’s projections. But the tables have reversed lately and it appears that economists may soon be upgrading their guesstimates for Q1 GDP, or so one can reason via the GDPNow model.

There’s no guarantee that the Atlanta Fed’s estimate is correct, although the bank’s model has had an impressive run of delivering relatively reliable estimates of the quarterly GDP data. Has this methodology’s winning streak hit a wall? The answer arrives in two months—April 28, when the US Bureau of Economic Analysis publishes the “advance” estimate of Q1 GDP.

Meantime, mere mortals are left to grapple with a rather hefty divergence in two variations of the macro outlook. Mr. Market could be right, of course, but he could be wrong. As Paul Samuelson famously quipped, “The stock market has called nine of the last five recessions.”

For the moment, there’s reason to wonder if the crowd’s market-based sentiment is overly pessimistic. It wouldn’t be the first time that a markets-based view has been wrong about recession risk. The difference this time is the magnitude of the chasm between the market’s implied forecast and the GDPNow model’s macro estimate.

The case for cautious optimism also finds support in other methodologies for gauging macro risk. The Philly Fed’s ADS Index tells us that recession risk is low. Ditto for the Feb. 14 update of The Capital Spectator’s business-cycle indexes.

The next opportunity for a shift in macro expectations based on the hard data arrives tomorrow (Feb. 18) via the January numbers on residential housing construction and industrial output. In the current climate, it’s safe to say that big surprises, for good or ill, in those reports could bring hefty market reactions.

In the meantime, Mr. Market’s gloomy forecast of late has yet to find confirmation in the economic indicators writ large. In other words, there’s a comeuppance lurking around the next bend. Either the markets-based signal will turn substantially brighter at some point in the days and weeks ahead or we’ll see a dark turn in the hard numbers that aligns with Mr. Market’s grim forecast. One way or the other, the current conflict of expectations will be resolved, and perhaps quite soon.

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