“There's just something about Q1,” Goldman Sachs economist Alec Phillips wrote late last month, “residual seasonality in some components of GDP explains around half of the weakness,” but that leaves the other half unexplained. We will not know until April 29th what the preliminary (the so-called “advance”) estimate for GDP will read, but economist predictions have trended lower recently. As of last week, Goldman predicts a seasonally adjusted annual rate (SAAR) of 0.8% growth, and the Atlanta branch of the Federal Reserve System predicts 0.0%, significantly below the “Blue Chip consensus” (see image below). 2014 illustrates the volatility of the official data releases themselves, with the advance 1Q14 estimate last year initially printing at negative 2.9%, only to be revised up nearly a full percentage point to negative 2.0% a month later. Forecasting challenges aside, Phillips notes that business investment, defense spending and local government spending all typically decline in Q1, dragging the overall figure down 1.1 percentage points, he reckons, making up about half the difference between Q1 growth and growth in other quarters. From 2010 to 2014, Q1 GDP has grown around 0.6% on average, whereas other quarters have averaged a significantly higher growth of 2.9%. Looking forward, we expect weak Q1 GDP growth hindered by declining energy sector business investment as a result of lower energy prices and some weakness from a stronger dollar. But as the positive effects of lower energy prices continue to materialize in coming months—most notably additional discretionary income for consumers—we expect an upward revision, although probably not as dramatic as what we saw in 2014. Regardless, our broad economic outlook remains tepid, and our portfolio positioning, which is neutral to slightly overweight duration, reflects our view that there is a greater likelihood that the headwinds will outweigh the tailwinds, interest rates will stay put and the Fed will continue to delay its hiking cycle, possibly into 2016.
Sources: GS, Atlanta Federal Reserve, Blue Chip Economic Indicators, Blue Chip Financial Forecasts, SNWAM Research