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First-Quarter GDP Could Be Negative

John Early profile picture
John Early


  • Seven-factor model estimates 0.3% Q1 GDP growth.  A decline in real retail sales or further declines in stocks could tip the estimate negative.
  • 0.3% is a big gap from other forecasts: Atlanta Fed GDPNow at 3.5%, the Blue Chip Consensus is 2.7% and the Wall Street Journal at 2.9%.
  • Even if Q1 comes in negative it will probably not be the start of a recession. With 42% of data available, the model estimates Q2 will bounce back to 2.7%.
  • The stock market decline should remain just a correction and not the start of a bear market.
  • Trump’s tax cut likely leads to stock market strength, but not economic strength.

The Model attempts to find the combination of seven indicators or influences that work together to best predict GDP. It estimates the relationship of quarterly GDP growth with the quarterly change of the seven factors over rolling 11-year periods. Quarterly changes are plotted as annual growth rates. The lead time of the factor with the highest correlation is used in the model. As time moves on factors may come or go from the model. There were no factor changes or significant weighting changes in the last quarter.

The Seven Factors

The S&P 500 (purple line and dots, lagging 2 weeks) I’m estimating the 13 weeks 1/17/18 through 4/11/18 which associate with Q1 GDP growth will have an average price of 2748. This would be a 17.7% annualized rate of increase from the 2634 average of the previous 13 weeks. The six weeks of data so far available have averaged 2749. For purposes of the model, the baseline is that stock prices from here will rise through the second quarter at an annualized rate of 10%. If the stock market correction continues during the next seven weeks, which I think is quite possible, those declines could pull the model estimate for Q1 to the negative side.

Real retail sales (Orange Line, concurrent) Sales shrunk 0.8% in January. This was the largest decline since January 2014 and second biggest decline since 2009. We could look at this as putting the growth rate of real retail sales back on the trend line of the last 7 years.

The baseline estimate for the monthly data points we don't yet have is that sales will grow at an annualized rate of 2.5% through the second quarter. However, if real sales decline in one of the next two months, it could pull the Q1 GDP estimate to the negative

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.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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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Comments (23)

The Nattering Naybob profile picture
Mr. Early,

Ignore the snark. Aside from the disposition of tax savings or revenues, 80% buy backs, and the dissipation of transitory factors which caused the head fake, and narrative induced inflation hysteria trap, of which many have unfortunately drank the kool-aid...

Stay grounded and look to what's in your wallet, viz. spending, reflective of AD, based upon available funds or means of payment, predicated upon personal real income, borrowing and savings. Not of the fat and happy few, but those who live outside of that bubble.

As for that recon trip to the Forbidden Zone (the ledger of truth) remember this...

Taylor: There's got to be an answer.

Dr. Zaius: [with surprisingly genuine sympathy] Don't look for it, Taylor! You may not...like, what you find.

Keep up the good work.

I'll go with GDPNow. Clearly there is a lot of momentum to the economy. The reason GDPNow starts typically 'high' is that it starts w/a model, but corrects it with realtime data.
John Early profile picture
jyardo1 I agree the GDPNow is usually much better than the blue chip consensus and often but not always better than the model above.
I would love to see President Trump’s reaction if he read this article. My guess is he would say “just wait and see” with a big grin on his face.
The current person in the WH doesn't read! and the grin is from dreams of Stormy,what a mess,thanks to Russian meddling and DJT cooperation.but "wait and see" what happens this November,oh yeh!
John Early profile picture
Javelina Yes wait and see is a great attitude. The bits of new data the model is waiting for and revisions to exiting data could push my forecast up or down from 0.3%. Hope you will be watching as closely as me April 27 when the first estimate for Q1 GDP comes out.
GDP growth rate can be negative, but GDP is always positive.
Calculus profile picture
still nice carry in the yield curve plus no "Japanese/Europe" lost decade issues. A disinflation is possible because of the impact battery storage and solar energy and the remarkable collapse in cost of launching a rocket. obviously shale oil and natural gas booms plus a boom in fuel distribution plus a "food boom" make for many cards in the hand of the Federal Reserve.

obviously the US Media "complex" dominates the World...literally and figuratively...still.

and of course there is the backdrop of massive Government spending "to combat that terrorist guy."

Hard to imagine a negative print for US economic growth "in the aggregate."

Of course "what is GDP?" is an interesting question too.
Tokman profile picture
Talked to a neighbor- blue collar guy. His compensation for the previous 10 years before Trump grew $30K... not bad you think. Now, in 1 year of Trump he makes $25K more... see the difference? 30k in 10 years vs 25k in 1 year... That's real life of a blue collar in rust belt. Thank you, President Trump!
There's one of three possibilities here:
1. The "blue collar guy" does not actually exist.
2. He does exist but is lying to 'Tokman'
3. He is telling the truth but the cause of new prosperity has absolutely nothing to do with Donald Trump.
. . . . . . That's about it!
steve1948 profile picture
Here's another possibility "cross", you don't know any blue collar workers.

Where I live in Florida it's booming. maybe it's a continuation of prior policies, but I've never seen anything like it.
I disagree completely.
My family has more disposable income and we are surprised to see how easy it is to dispose of. Steak, shrimp and ribs to celebrate, a little extra into the IRA and cash to HIRE LABOR to help us finish building our new greenhouse.(Thank goodness we don't have to do it all on our own.)
Chatted w/ my dear friend "A" the trucker today and she says that the tare rates are superb. She is setting aside her extra cash to make a big move. (new house)
Negative? Maybe the experts aren't really seeing real life the same way people in my tax bracket do... Negative? I think not.
HardCovenant profile picture
Can the author find a more irrelevant data point than winter GDP? So relieved the author reveals we are not in a recession...my newborn son has some sketches will SA post...
John Early profile picture
Q1 GDP will have a significant impact on the growth rate for 2018.

If Q1 2018 is weaker than the 1.2% growth rate in Q1 2017 and the year over year growth rate declines from Q4 2017, it will have implications about how beneficial Trump has been to economic growth.
MonteQuest profile picture
"Atlanta Fed GDPNow at 3.5%"

On March 7, GDPNow revised their Q1 forecast down to 2.8% on a drop in retail sales. Another update March 9.

Atlanta Fed is always high and is revised down. Nothing to see here people.
MonteQuest profile picture
On that point, I agree. It started at 5.4% for Q1. :)
John Early profile picture
MonteQuest Not sure how I missed that, but you are right.
Why the F- do we need to care about this model? Does it have better track record than other forecasts?
Good questions.
Data Resources marketed econometrics with success in the 1970s,
got bought by McGraw-Hill in the early 1980s and soon after businesses had had their fill and moved on.
John Early profile picture
The track record of this model is comparable to the other models. When there is a big difference as in the current forecast being aware of different possibilities could lead to better decisions.
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