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Sunday, December 06, 2020

Q4 GDP Forecasts: Uncertainty

by Calculated Risk on 12/06/2020 09:34:00 AM

Economic activity in the fourth quarter is dependent on the impact of the pandemic. With the number of new cases per day of COVID approaching 200,000, hospitalizations at record levels (over 100,000), and deaths per day at new record highs, it is likely that economic activity will slow in December.

Most of the slowdown will be related to individuals being more cautious, and some will be related to government actions. For example, from the AP: Most of California to enter sweeping new virus lockdown

Economic activity was solid in October, and that would suggest PCE growth of close to 6% in Q4, even if November and December see no month-over-month growth.  No one expects a lockdown like at the end of March and in April, but it is possible that activity slowed in November and will decline in December.

The high level of uncertainty over the next few months makes forecasting extremely difficult. The automated approaches (below) do not capture this uncertainty.

From Goldman Sachs:

We left our Q4 GDP tracking estimate unchanged at +3.2% (qoq ar) [Dec 2 estimate]
From Merrill Lynch:
We continue to track 33.1% for 3Q GDP and 6.0% for 4Q GDP. [Dec 4 estimate]
From the NY Fed Nowcasting Report
The New York Fed Staff Nowcast stands at 2.5% for 2020:Q4 and 5.9% for 2021:Q1. [Dec 4 estimate]
And from the Altanta Fed: GDPNow
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2020 is 11.2 percent on December 4, up from 11.1 percent on December 1. [Dec 4 estimate]
It is also important to note that GDP is reported at a seasonally adjusted annual rate (SAAR).  A 3.3% annualized increase in Q4 GDP (close to Goldman's forecast), is about 0.8% QoQ, and would leave real GDP down about 2.7% from Q4 2019.

The following graph illustrates this decline.

Recession Measure, GDPClick on graph for larger image.

This graph shows the percent decline in real GDP from the previous peak (currently the previous peak was in Q4 2019).

This graph is through Q3 2020, and real GDP is currently off 3.5% from the previous peak.  For comparison, at the depth of the Great Recession, real GDP was down 4.0% from the previous peak.

The black arrow shows what a 3.3% annualized increase in real GDP would look like in Q4.