BAML: Everyone is way too bearish

Economists at Bank of America Merrill Lynch estimate there was no economic growth in the first quarter. And they think the recovery is still on track.

In a note Monday, BAML economists pointed out that this is the third Q1 in a row where forecasts started out looking for about 2% growth, and then were cut to almost flat by the time the advance estimate was due.

On Friday, the Atlanta Fed’s GDPNow tracker, which uses real-time data to forecast economic growth, cut its forecast for Q1 gross domestic product to 0.1%. In other words, it estimates that the economy almost contracted.

The forecast cut came right after the Commerce Department released data on wholesale inventories for February and January that were weaker than expected.

“They [Atlanta Fed] are far from alone: both we and the consensus have been doing the same thing,” BAML’s Ethan Harris and team wrote. “This weakness adds to market scepticism about a June Fed hike.”

Harris is projecting 0% GDP in Q1.

Screen Shot 2016 04 11 at 7.54.11 AMBank of America Merrill LynchWe’ve had these downward revisions before.

And for those peddling the idea that the Q1 outlook means the economic recovery is under threat, BAML has four reasons why it doesn’t think so:

  • The data looks “fine” outside of the GDP adding up.
  • There might be lingering seasonal adjustments that are driving some of the weakness.
  • The fundamental backdrop points to moderate growth, not a big slowdown.
  • Most important, quarters with near-zero growth on an annual basis should not be a surprise, with potential growth dropping below 2%.

We’d remind readers that the advance estimate of GDP, due April 28, will be revised three more times in the following weeks.

In the fourth quarter, we saw the prints rise from 0.7% in the advance estimate to 1.4% in the third estimate.

And much later, when the Commerce Department has more complete data, it will publish annual revisions.

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