No matter how fast the economy grew in the third quarter of this year, it’s very unlikely to be a sign of sustained growth.
Tomorrow morning the Bureau of Economic Analysis will publish its first estimate of gross domestic product for the July through September period. After two consecutive quarters of contraction, the economy is expected to have returned to growth.
Exactly how fast the economy is growing is a matter of wide disagreement. The consensus estimate of forecasters surveyed by Econoday is for an annualized rate of 2.3 percent. The range of estimates, however, is wide: 1.4 percent to 3.1 percent. Many of those estimates have shifted rapidly as volatile data have come in over the past month.
Take Bank of America’s estimates. At the start of October, Bank of America saw the economy growing at a 1.3 percent rate. Better than-expected August trade data pushed the estimate up to 1.5 percent on the fifth of October. The solid report on retail sales for September sent it up to 1.9 percent at the end of the second week of the month. The estimate rose as high as 2.5 percent before being knocked down to two percent by worse than expected trade deficit and business inventories figures on Wednesday.
The Atlanta Fed’s GDPNOW model had mostly been tracking the Bank of America estimate, albiet with a bit more volatility. It climbed from less than one percent at the start of the month to 2.9 percent last week. Confusingly, the most recent data pushed it up to 3.1 percent–exactly the opposite of what happened in the Bank of America GDP tracker.
The first thing this difference highlights is how unstable and unpredictable the economic data has become. While looking at much of the same data, the GDP trackers of the Atlanta Fed and Bank of America produced estimates with a 35 percent gap between them. Of course, the two models do employ slightly different data. The Atlanta Fed’s GDPNOW is based entirely on publicly released economic data while we understand the Bank of America tracker uses proprietary data in addition to the official releases.
It’s worth keeping in mind that tomorrow’s report will probably not definitively decide who got the GDP estimate correct. The first estimate for the first quarter’s contraction was minus 1.4 percent. The second estimate had the economy shrinking at a 1.5 percent rate. The third pushed it to 1.6 percent. For the second quarter, the revisions went the other way. The first estimate was for a contraction of 0.9 percent. The second estimate was for a contraction of a milder 0.6 percent. So, the first estimate of the third quarter growth figure is likely to be quite different from the final estimate.
The growth report will present a challenge to the integrity of many of Biden’s supporters in economics, finance, and journalism. When the economy shrank in the first quarter, this was widely written off as a “technical” contraction because a large part of it was due to a large trade deficit and an unwinding of the aggressive inventory buildup at the end of 2021. Consumer spending and investment had remained strong, the supporters argued.
This time around, the balance of trade is likely to make a large, positive contribution to GDP. Under some estimates, the change in net exports will explain almost all of the growth. So, will the Biden supporters who dismissed the first quarter contraction as merely technical do the same with the third quarter expansion? We eagerly await the answer.
The reality is that the third quarter expansion will almost certainly prove to be an economic head fake. The economy will almost certainly return to contraction in the fourth quarter of this year or the first quarter of next year as housing becomes an even bigger drag, consumer spending tapers, and business investment retreats in anticipation of the Fed hike-induced recession.