5 Reasons GDP Growth In Q4 May Be 0%

Jan. 05, 2015 1:17 PM ETSPY8 Comments
John Early profile picture
John Early


  • All the happy talk about growth accelerating to 3%, 4% or even 5% should crash against a different reality on January 30th when Q4 GDP is announced.
  • Lower oil prices won’t help GDP growth until late 2015 or 2016.
  • Five out of seven factors in our GDP model point to lower growth in 4th quarter. Two of them point to the weakest growth since 2009.

Our effort is to find the seven factors that work well together and give the most accurate look at the initial reading on GDP. The model does not include data points that become available after the initial announcement which make more accurate after-the-fact estimates possible.

Since we last wrote we have replaced two of the factors in the model. As reported earnings of the S&P 500 replaced stock prices and the quarterly difference in oil prices leading 21 months replaced the GDP's auto correlation.

Below is a chart that shows quarterly GDP, the model, the 7 factors in the model and the monthly data points used in each factor.

The model suggests GDP will grow 0.1% in the fourth quarter. The standard deviation of 1.3 suggests better than even odds growth will be between -1.2 and 1.4. This is a big gap from mainstream forecasts of around 2.5% to 3%.

Housing starts (shown in brown in the chart above) may account for a large part of the gap between our model and other forecasts. Using the nine month lead time, which has the best correlation, starts suggest GDP will have its weakest quarter since 2009. Housing starts were also calling for a weak Q1 2014 GDP which came in at -1.9%, while mainstream predictions for the initial estimate were around 3%.

The brown housing starts axis is calibrated for its weight in the model, as are the axes for the other six indicators. So if you took a ruler and visually added up the net change in each of the seven indicators it would equal the change for the model shown in red.

Monthly data points are shown as dots. Each segment in a line is the average of three monthly points that correspond with a quarter of GDP growth. Each monthly

This article was written by

John Early profile picture
Have managed money for clients as an independent advisor since 1991. Published a newsletter ECONOMIC LEADS from 1988 to 1993. Have an economics degree from Vanderbilt University. Focus on the macro picture forecasting the US economy and broad stock market. Also have a model to estimate long term equity returns for several countries.

Disclosure: The author is short SPY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: There is no guarantee analysis of historical data, their trends and correlations enable accurate forecasts. The data presented is from sources believed to be reliable, but its accuracy cannot be guaranteed. Past performance does not indicate future results. This is not a recommendation to buy or sell specific securities. This is not an offer to manage money.

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