US economic growth – reported overnight – was a shocker. The economy grew by a paltry 0.2% in seasonally-adjusted annualised terms (saar) – well below market expectations for an increase of 1.1%.
Initially, and understandably, markets took the view that it will further delay the US Fed from hiking in the second half of the year. However, as quick as those thoughts began to permeate across the markets, they were reversed with the FOMC statement revealing committee members believe that the weakness in the GDP report was “transitory” – a code word for “temporary”.
As BI’s Myles Udland wrote after the release of the statement, “markets don’t know what to think”. That’s about as accurate as one could have put it. The data was weak but the Fed doesn’t expect it to stay that way, or so they think.
Perhaps one has to look at the underlying factors that have led to this confusion.
To me there are two key reasons that explain it: Q1 GDP is typically the weakest quarter, and the market is learning not to trust this data anyway because it has been subject to such heavy revisions in subsequent releases.
As the well-renowned professor of economics and public policy at the University of Michigan Justin Wolfers noted in the New York Times last week “the government’s economic statistics are meant to adjust for these predictable seasonal swings, through a process known as seasonal adjustment. But it appears that these adjustments have failed to do the job”.
As Wolfers rightly puts it, if seasonal adjustments are applied correctly, “there should be no systematic difference between economic numbers for the first quarter and any other quarter”.
Clearly – based off what we’ve seen in recent years particularly – the seasonal pattern is still apparent in the data despite trying to remove it.
As this chart from the Bureau of Economic Analysis shows the abnormality seen in the GDP data is not apparent in other indicators such as employment growth.
Aside from the anomaly surrounding seasonal adjustments there is second factor that helped create uncertainty across markets overnight – the highly volatile nature of the advanced GDP release.
Deutsche Bank’s US chief economist Joseph Lavorgna – writing before the release – picked up on the uncertainty it creates: “These figures are highly preliminary and prone to massive revisions. Last year, the first reading on Q1 output was reported at 0.1%, only to be revised down to -1.0% one month later and then to -2.9% one month after that. ”
So, from the advanced Q1 GDP estimate of 2014 through to the final, the economy went from growing 0.1% to contracting 2.9%.
It’s pretty hard make policy decisions – or indeed investment decisions – based off revisions of that magnitude.
Despite misgivings about the GDP data it still remains one of the key economic reports for markets and policymakers alike. But while an informed market is one of the cornerstones of efficient market function what is more important: getting the data early, or getting a more accurate picture slightly later?
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