December Quarter’s GDP Growth Forecasts Are All Over The Map

The U.S. Bureau of Economic Analysis’ (BEA) third estimate for the September quarter’s GDP growth rate came in at 33.4%, after falling 5.0% in the March quarter and dropping 31.4% in the June quarter. Even after a dramatic rebound, the economy is still 3.4% smaller than it was in the December quarter last year.

Keep in mind the reason the September quarter’s growth was so large was due to the huge decrease in the June quarter. The way the BEA calculates GDP growth is to take the quarter-to-quarter change and essentially multiply it by four. In a more “normal” economy, this way of estimating GDP growth is fine, but when the economy goes through such convulsions it magnifies the negative and positive movements.

A major challenge for the economy is that many of the sectors that drove the recovery in the September quarter will be impacted by the resurgence in Covid-19 cases. As shown in the chart below Health Care and Social Assistance contributed the most, but with coronavirus cases increasing elective surgeries and visits will be cut back again. The third-largest contributor, Accommodation and Food Services, will also be hit as restaurants close. This segment should be a drag on the December quarter’s GDP growth rate.

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Another analysis of the rebound is to look at the SAAR, or Seasonally Adjusted Annual Rate, of change in dollars from the June to September quarter. Oren Klachkin at Oxford Economics calculated that Accommodation and Food Services had the largest increase from very depressed levels with an increase of $344.2 million and Arts, Entertainment and Recreation rose $291.7 million. However, these are still 28% below pre-coronavirus levels.

What is happening now in the economy?

Unfortunately, the economy’s rebound is dissipating and President Trump not signing the coronavirus relief bill and funding the government will only make it worse. This can be seen in various trackers of the economy and consumer confidence.

The first chart is from Oren Klachkin at Oxford Economics, and it tracks the economy in five geographic areas. While it shows a bit of an upturn in late November from the economy getting weaker post-September, it appears to have reverted to a downward slope.

The most recent reading on consumer confidence showed declines, not a great signal going into the holiday spending season combined with increased coronavirus cases, hospitalizations and deaths. The Conference Board said, “the Consumer Confidence Index® declined in December, after decreasing in November. The Index now stands at 88.6 (1985=100), down from 92.9 in November. The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – decreased sharply from 105.9 to 90.3. However, the Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – increased from 84.3 in November to 87.5 this month.”

Lynn Franco, Senior Director of Economic Indicators at The Conference Board, said “Consumers’ assessment of current conditions deteriorated sharply in December, as the resurgence of COVID-19 remains a drag on confidence. As a result, consumers’ vacation intentions, which had notably improved in October, have retreated. On the flip side, as consumers continue to hunker down at home, intentions to purchase appliances have risen. Overall, it appears that growth has weakened further in Q4, and consumers do not foresee the economy gaining any significant momentum in early 2021.”

All three of these Index’s are shown in the graph below from Gregory Daco at Oxford Economics, with all of them basically at the lows reached a few months ago.

What are the outlooks for the December quarter’s GDP?

The Federal Reserve Bank of Atlanta publishes data and a graph that estimates the GDP growth rate of the current quarter. It may have the highest growth rate of almost all the analysts that forecast the economy. Keep in mind the Atlanta Fed’s GDPNow projection is based on a formula from previous quarters and the impact of Covid-19 could be having a material influence on the estimate.

The GDPNow model is showing the December quarter to have 10.4% growth compared to the Blue Chip consensus range of 1% to 6%. Gregory Daco at Oxford Economic was at 6.1% as of two weeks ago.

The Federal Reserve Bank of St. Louis has a Real GDP forecast that is updated once a week. Its current projection for the December quarter is 4.5%.

And lastly, the Federal Reserve Bank of New York’s most recent estimate is 2%. As can be seen in the chart it has steadily decreased over the four months. This is in contrast to the Atlanta Fed’s sharp increase in November and being essentially flat since then.

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