Friday, May 02, 2014

Merrill: Q1 GDP now tracking negative 0.4%

by Calculated Risk on 5/02/2014 06:30:00 PM

The data flow suggests Q1 was even weaker than the 0.1% real annualized growth rate reported earlier this week. From Merrill Lynch:

The advance 1Q GDP report revealed growth of only 0.1% qoq saar, about a full percentage point less than we had expected. After accounting for weaker-than-expected construction spending and nondurable inventories in March, 1Q GDP is now tracking -0.4%. This is clearly disappointing and pulls down estimates for annual GDP growth.
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With all the optimism to start this year, nobody was predicting the economy would contract in 1Q. Based on the Blue Chip forecasts in December last year, the average forecast for 1Q was 2.5% with the top 10 highest forecasts of 3.2% and bottom 10 of 2.0%. Obviously, we were all taken by surprise by this brutally cold winter.

It seems that the economy cannot catch a break – each year there is some explanation for a lack of momentum. It was the European crisis in 2010, the US debt rating downgrade/Greek exit in 2011, gridlock in Washington in 2012 and fiscal tightening/government shutdown in 2013. But the shock from weather does not linger and actually reverses quite quickly. With the harsh winter weather in our rearview mirror, we can focus on the underlying healing of the economy, which we think has been significant.

We believe the economy is on track to bounce back, leading us to revise up 2Q GDP growth to 3.6% from 3.2%. However, this increase does not entirely offset the weakness in 1Q, leaving our forecast for annual GDP growth to slip to 2.5% from 2.7%.
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Importantly, we think the strength in 2Q is not just a one-quarter bounce. We expect growth to remain strong, averaging 3.4% growth in both 3Q and 4Q.