The report from the Bureau of Economic Analysis (BEA) of 0.2% annualized seasonally adjusted GDP growth for the first quarter of 2015 came in very close to the Atlanta Federal Reserve estimate of 0.1%, but way below the consensus estimates of the most highly placed economists, which were concentrated in a range between 1% and 2%.
This was an advance report, however, and it will be important to watch the revisions. In Q1 of 2014, the revisions from advanced to final took the growth rate from positive to negative/contraction. The same is probable this year as the preponderance of economic reports that have come out since Q1 ended have continued the negative trend of the quarter, and that was also evident in late Q3 and throughout Q4 last year. That also implies the negative trajectory is less about weather and oil, to which most analysts have been attributing Q1 performance.
I've concentrated many columns on the subject of the real economic activity vs. the narrative concerning such that has been offered by the Federal Reserve over the past six months, because it became apparent late last year that the Fed was intent on taking a hear/see/speak-no-evil attitude toward the economy as it sought to sell the concept and necessity of higher rates during that time.
The reason I did so was so that at least here subscribers would have a historical record of commentary to refer back to should they desire.
I'll write more about the internals of the GDP tomorrow so that I can combine it with commentary from the FOMC statement due out today.
A quick point, however, as I discussed yesterday, the GDP deflator indeed played a big part in producing a positive print today. The deflator was moved to a negative 0.1% from a positive 0.2% in Q4 2014.
Note: The deflator can be found on page 10 line 31 of the BEA report in the link above. I'm happy to discuss the issue in the comments section below if anyone would like.
The decline in the deflator, which is best thought of as price inflation, is most logically due to the impact of much lower oil prices in Q1 2015 from Q4 2014. Moving it into negative territory, a very rare event and one typically associated with recessions, allowed the GDP print to be positive. Again, however, that could change with revisions.
On a more general note concerning the report, the fact that the BEA did not produce a higher GDP print in keeping with the expressed request for such by the private sector economists, and instead came in with something almost exactly as the Atlanta Fed staff economists had expected may be indicative of a shift toward more accurate reporting of economic activity by the various government agencies responsible for doing so.
This is exactly the issue that gave rise to the various nowcasting systems being produced by some of the Federal Reserve banks that I discussed last year in the column, "The Rise of 'Nowcasting' Economic Activity."
Part of the reason the Fed staff created these systems was not just because of the perpetual overestimation of economic activity by private sector economists but by the Fed bank presidents and governors, too.
The signal being sent by the BEA print matching the Atlanta staff expectation and not meeting the private sector predictions, which are really requests sent by them to the BEA of what they want the GDP print to be, is also a message being sent by the Fed staff to the Fed governors and bank presidents concerning the management of monetary policy and the rationale offered for it.
I don't know what will be in the FOMC statement today, but as I've written on many occasions over the past several months, the blanket justification of calling all poor economic activity reports "transitory," which implies that they need not be considered for monetary policy decisions, is most probably at a close.
I'll write more about all of this tomorrow.
From an investor standpoint, the probability of rate hikes coming soon, if ever, is likely off the table for now, unless the Fed lays out a brand new strategy for monetary policy. So far it hasn't done that and I think it is not likely to.
If the revisions to Q1 GDP come in below the advance figures released today, increases in both monetary and fiscal stimulus will become increasingly more probable.
I'm of the opinion that it is more probable the Fed will provide more stimulus before raising rates.
That also means the government contractors should do well, as I wrote about in April in the column, "Government Contractors' Windfall Ahead."
Clarification: A previous version of this column indicated that the author believed the Fed would raise interest rates soon. The author's intent was to say that the Fed would provide more stimulus before raising rates.