The macroeconomic forecasting business has become quite unhinged in the current situation, with existing models seeming to have their wheels coming off as old relationships simply do not hold and reported data seems unreliable and going in all sorts of directions. We have already seen this happen regarding forecasts that were made for the May employment numbers, with most forecasters projecting employment declines that would have been more than 10%, some of them by a lot more than that, although none more than 20%. But in the end employment was estimated to have grown by over 2%, a situation of the forecasters simply being wildly wrong.
As it is, with the month of June now over and thus the second quarter over, it looks increasingly to me like most of the forecasters have not learned their lessons from that May employment fiasco. I suspect that in many organizations they find it hard to revise their models, especially on short notice, even when it is clear their models are not working. We see a lot of the forecasters making predictions of a large second quarter decline in GDP, but more numbers have come out for May, and most of them have been positive, some of them very positive, and if June continues to be positive, even if at a lesser rate than May given renewed shutdowns occurring due to the uptick in Covid-19 infections as June proceeded, this may further make some of these strongly negative forecasts even further off.
So what are some of these forecasts and what do the latest reported numbers look like? First, we must note the first quarter outcome. It seems that GDP declined by -4.8% or 5.0% for the first quarter at an annualized rate. All of the decline occurred in March, more than offsetting modest growth in both January and February.
But the forecasts for annualized rates of decline for the second quarter are awesome, at least most of them. I am getting these from a post by Menzie Chinn over on Econbrowser and are from less than a week ago on June 26. Here are some:
New York Fed -16.3%
St. Louis Fed -38.16%
IHS Markit -35.3%.Clearly, the only one not showing a massive decline is the New York Fed.
Menzie also showed how the forecasts have evolved for two other forecasters. A blue-chip group’s forecast was for a -25% rate on April 30, but slid to -35% by June 5.
The Atlanta Fed has had its forecast make large movements, starting out at a relatively modest -12% as of April 30, but then plunging to a whopping -54% as of June 5, but then in the face of more recently improving data by June 26 this forecast had moved to not a not quite as whopping -40%.So what does estimated data look like? One estimate I have seen for the month of April had the actual decline of GDP being -11.4%, which translates to about a -42% annualized rate. But we already see here the danger for all of those forecasts listed above except for that of the New York Fed. It is near certain indeed that the economy has been growing in both May and June. If so that annualized rate of -42% looks to be a definite outer bound.
Now if there has been barely any growth in May and June we might still see numbers in the 30s for the annualized rate of decline. But at least for May the numbers do not look like that. We have already seen employment grow at over 2%, which is the actual growth, not the annualized, which is much higher. We now have an estimate for consumption, which grew at over 17% in May. Given that consumption is on the order of 70% of GDP that is pretty much the ballgame right there, barring some sharp turnaround in June. This is especially the case as estimates of construction also seem to show sharp growth in May, a major component of investment, although if inventories fall sharply, that might offset the construction increase. State and local governments were almost surely declining and probably still are, but probably not a massive rates. Trade is especially hard to predict, with indeed net exports appearing to decline in April by somewhere between -7 and -16%. But exports might actually be rising now as much of the world economy appears to be growing again.
The apparently steep decline of GDP in April will be hard to overcome during these past two months. But it is not out of the question that we might actually see a slightly positive figure for the quarter, especially if it turns out that growth in June continued to be as strong as it looks like May was. But even if it flattened out some as I suggested might happen in a recent post, it looks to me that the sharply negative predietions still being held to by so many forecasters simply look to be way off. Even the much less negative New York Fed may prove to have been too negative, even if indeed the quarter outcome is still negative overall for GDP growth, with it probably going to be more than a month before we shall know at all reasonable.
I conclude by noting that even if the second quarter is positive or only mildly negative, growth prospects going forward for the near future look less promising. This is not only because of the recent spiking of Covid-19 cases with associated shutdowns but also because portions of the large fiscal stimulus that has been going on and has probably aided the recent growth will have disappeared or will do so unless Congress acts to keep them going. In particular, the individual stimulus checks have ceased, and the expanded unemployment benefits are scheduled to cease at the end of July. What is more certain is that we are truly profoundly uncertain about what will transpire in the next few months.