The Atlanta Federal Reserve Bank’s prediction for GDP growth is huge, and market watchers are split as to whether they should be worried or not. The prediction is based on its hands-off forecasting model called GDPNow. The model’s new estimate for second-quarter U.S. Gross Domestic Product (GDP) is surprisingly high at 4.2%. This would be a significant upward revision from the previous estimate of 3.3%.
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What is worrisome is if the forecast is accurate, it would be high enough to renew inflation concerns and even questions as to whether the Fed needs to hike rates in order to throw some cold water on the economy.
Economists’ GDP Forecast
Each quarter GDP is released for the previous quarter in a series of two initial estimates about a month apart, followed by a final estimate. Economists, surveyed by FactSet, anticipate that the second-quarter GDP estimate will decrease to 2.9% from the earlier released estimate of 1.6%
If the economists are correct, the market reaction would likely be muted. However, if The Atlanta Fed’s GDPNow forecasting model is correct, investors may be in for a wild ride.
Potential Market Repercussions
If accurate, some financial experts are confident the market repercussions would be dramatic. Andrew Brenner, head of international fixed income at NatAlliance Securities, raised his concerns. He views the 4.2% figure as “a very hefty number that does not coincide with most economic forecasts.” His apprehension centers on the potential impact on interest rates.
If the market believes this high GDP growth is real, Brenner warns that “we will fail to reach further low yields” and could see a rise in interest rates. This, in turn, could trigger a market sell-off as investors react to the prospect of tighter monetary policy.
Others are taking a “garbage-in-garbage out” view of the data that goes into the completely mathematical GDPNow forecasting model. The market research firm, DataTrek‘s, co-founder Nicholas Colas advises caution, particularly when considering the timing of the revision. He explains, “I discount the first month of GDPNow quite a bit. The data isn’t really there yet to draw any conclusions.” Colas highlights the limitations of early estimates, suggesting that the picture may become clearer as more data becomes available.
The Importance of GDPNow for Investors
The Atlanta Fed’s GDPNow tool serves a vital role in the financial landscape. By providing real-time updated forecasts on economic growth, it allows investors to gauge the health of the economy and adjust their strategies. A high GDPNow estimate, if substantiated by later official data releases, could signal a need to adjust portfolios for a rising interest rate environment. Conversely, a downward revision might indicate a more accommodative monetary policy from the Federal Reserve.
Key Takeaway
The Atlanta Fed’s sharply revised GDPNow estimate has injected uncertainty into the market. While some fear a potential rise in interest rates and a market sell-off, others urge caution and emphasize the need for more data points before drawing definitive conclusions. As the Bureau of Economic Analysis releases its official GDP estimate on June 27th, astute investors will be closely monitoring these developments to navigate the evolving economic landscape.