“The official estimate of real GDP growth for the first three months of 2015 was shockingly weak,” says the latest research from the Federal Reserve Board of San Francisco, released yesterday.
But the paper, authored by Glee D. Rudebusch, Daniel Wilson, and Tim Mahedy, says that “such estimates in the past appear to have understated first-quarter growth fairly consistently, even though they are adjusted to try to account for seasonal patterns.“
The researchers took a fresh look at the seasonal pattern in the published real GDP data and then added an “additional seasonal adjustment to those data”. They found that “a second round of seasonal adjustment implies that real GDP growth so far this year appears to have been substantially stronger than the BEA initially reported.”
The increase in annualised growth is a material one with Rudebusch, Wilson and Mahedy finding that:
The application of second-round seasonal adjustment increases real GDP growth in the first quarter of 2015 from its initial published value of 0.2% to 1.8%. Taking this correction at face value, real GDP growth in the first quarter was stronger and much closer to the economy’s sustainable rate of trend growth.
That’s important because we already know Fed vice-chair Stanley Fischer believed the seasonal patterns have changed and that the current situation of zero interest rates can’t continue forever.
Likewise Deutsche Bank’s US Economist Joe laVrgna has also called into question the seasonal patterns currently being used.
So, with unemployment at 5.4%, if the influential San Francisco Fed, Janet Yellen’s alma mater, also believes that the economy is stronger than the current numbers suggest, “that there is a good chance that underlying economic growth so far this year was substantially stronger than reported,” then the Fed is closer to the first hike of this cycle than many believe.
You can read the full research paper here.