Atlanta and New York Federal Reserve Banks Point to Much Slower GDP Trends

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The first quarter of 2019 was a serious surprise in growth, with gross domestic product coming in at 3.1%. While it was revised down from the first preliminary reading of 3.2%, and while much was tied to inventories and other one-time issues, it was still undeniably strong.

One lesson that investors and consumers alike have to have learned by now is that nothing lasts forever. It’s too soon to be looking for an economy-crushing recession, but the reality is that growth looks like it should be a lot slower in the second quarter of 2019 and perhaps later in the year as well. The global growth story has continued to be weak, and a trade war between the United States and China was just complicated further by an initial round of 5% tariffs on goods coming into the United States from Mexico.

The Federal Reserve Bank of Atlanta tracks real gross domestic product trends with its own GDPNow forecasting model, as a”nowcast” of the official estimate long before the official GDP release a month after the end of each quarter. It is important to understand that the GDPNow is not an official forecast from the Atlanta Federal Reserve, but it is one instrument that tallies up the live trends based on major economic releases as they come out.

The latest forecast, updated as of May 31, 2019, was for second-quarter GDP growth to be just 1.2%. While this is rather weak, it is also down one-tenth of a point from the 1.3% forecast from May 24. The Atlanta Fed did bear down some of the updates, noting:

A slight increase in the nowcast of the contribution of personal consumption expenditures to second-quarter real GDP growth from 1.99 percentage points to 2.03 percentage points after this morning’s personal income and outlays report from the U.S. Bureau of Economic Analysis was more than offset by a decline in the nowcast of second-quarter real nonresidential equipment investment growth from 0.7 percent to -1.4 percent after yesterday’s and today’s economic releases.

The report did not mention May’s lower revised consumer sentiment reading from the University of Michigan, and it is not taking into account any would-be projections from the “if and when” on tariffs for goods coming in from Mexico. The Atlanta Fed also noted that the next GDPNow update will be available on Monday, June 3.

A competing note comes from the Federal Reserve Bank of New York with its Nowcast for GDP trends. This is released each Friday. The latest Nowcast ticked up by about 0.1% to 1.5% GDP growth for the second quarter of 2019. The report cited positive surprises from price data and data revisions accounting for most of the increase after the personal spending, income and consumption data were released. It also did not take consumer sentiment into account.

While economists and investors know these numbers can be rather volatile and that the data that is officially released is often starkly different from mid-quarter Nowcast and GDPNow forecasts, we are now two-thirds of the way through the second quarter of 2019.

The China tariffs were implemented halfway through the second quarter, and we have yet to see what the impact will be on the fresh tariffs targeting Mexico. Either way, the softness for this summer is looking like a much lower growth reading for the second quarter of 2019, compared with the first quarter’s strength. Moreover, it is setting up for a potentially weak third quarter of 2019 as well.


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