Before the February Personal Income and Outlays report, most analysts were expecting real GDP growth of over 3% in Q1. As an example, Paul Kasriel at Northern Trust was forecasting 3.1% real GDP growth with 2.2% real Personal Consumption Expenditure (PCE) growth, and Goldman Sachs was forecasting 3.5% real GDP growth with 3.0% real PCE growth.
Both of those forecast now look too high.
Note: The quarterly change is not calculated as the change from the last month of one quarter to the last month of the next. Instead, you have to average all three months of a quarter, and then take the change from the average of the three months of the preceding quarter.
So, for Q1, you would average PCE for January, February, and March, then divide by the average for October, November and December. Of course you need to take this to the fourth power (for the annual rate) and subtract one. Also the March data isn’t released until after the advance Q1 GDP report.
There are a few commonly used methods to forecast quarterly PCE growth after the release of the second month of the quarter report (February for Q1). Some analysts use the “two month” method (averaging the growth from October-to-January with the growth from November-to-February). Others use the mid-month method and just use the growth from November-to-February.
Either way, the first two months of Q1 2011 suggest PCE growth of around 1.4% for the quarter as shown in the following table.
PCE, Billions (2005 dollars), SAAR3 Month Change (annualized)Quarter (Annualized) Jan-10 $9,189.30 Feb-10 $9,228.20 Mar-10 $9,258.60 Apr-10 $9,257.20 2.99% May-10 $9,280.50 2.29% Jun-10 $9,289.30 1.33% 2.2% Jul-10 $9,302.60 1.98% Aug-10 $9,333.90 2.32% Sep-10 $9,355.40 2.88% 2.4% Oct-10 $9,402.80 4.38% Nov-10 $9,426.60 4.03% Dec-10 $9,439.30 3.64% 4.0% Jan-11 $9,435.10 1.38% Feb-11 $9,459.00 1.38% Mar-11
Although there are other components of GDP (investment, trade, government spending and inventory changes), it appears Q1 GDP growth will be lower than expected.
I still expect stronger GDP growth in 2011 than in 2010, but it appears 2011 is off to a sluggish start – and I’m concerned about world events and high oil prices.