When the government on Friday in all likelihood reveals that the economy contracted during the first quarter it raises two important questions: first, was the lousy quarter caused by temporary factors; and, second, will the sharp downturn lead to an equally sharp second-quarter rebound.
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The answers, respectively, are probably and maybe.
On Friday, the Bureau of Economic Analysis is widely expected to revise downward its estimate of first-quarter GDP, or gross domestic product, from a growth rate of 0.2% to a contraction of 0.8%.
David Kelly, chief global strategist at JPMorgan Funds, believes “the weakness in the first quarter appears to have largely been an aberration, reflecting bad weather on the East Coast, a dockworkers’ strike on the West Coast and suspect seasonal adjustment.”
Kelly also believes the economy is poised for an abrupt and predictable turnaround. “It should also be noted that the downward revision to the first quarter will likely be concentrated in international trade and inventories, and that, due to timing issues, this actually enhances the likelihood of a second quarter rebound,” he said.
Federal Reserve economists essentially agree with Kelly, suggesting repeatedly in both public comments and in official statements that the weak first quarter was caused by “transitory,” or temporary factors, and that all signs point toward sustained if not robust economic momentum through the rest of the year.
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Consequently, while the Fed has almost certainly delayed a decision on raising interest rates until at least September, pushing back a rate hike from mid-year 2015, as was widely-predicted when the economy was humming along in the second half of 2014, a rate liftoff is still expected sometime this year.
Worth Paying Attention To
Fed Chair Janet Yellen said as much last week, explaining that interest rates will move higher “this year” if the economy continues to improve along the path predicted by central bankers.
“If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy,” Yellen said in a speech in Providence, R.I.
The Fed hopes to raise interest rates in tandem with economic growth in an effort to ward off potential runaway inflation caused by the combustible mixture of years of accommodative monetary policy and an overheated economy.
Not everyone agrees with Yellen’s optimistic forecast, however.
Last month economists at the Federal Reserve Bank of Atlanta released their forecast for second-quarter economic growth – and it was very different from that of their colleagues in Washington, D.C.
Using a sophisticated forecast model called GDPNow, the Atlanta Fed predicted that second-quarter GDP will clock in at 0.9%. That’s well below the 3.25% estimate many economists have been forecasting as the economy ostensibly bounces back from the weak first quarter.
There are myriad economic forecasts floating around, but the Atlanta Fed’s second-quarter GDP prediction is worth paying attention to because they nailed their prediction on the initial dismal first-quarter GDP number.
The Atlanta Fed correctly predicted weeks ago that first-quarter GDP would be much worse than the 1% consensus offered by economists. The estimate from the Atlanta Fed was 0.1%, or slightly lower than the actual GDP of 0.2% reported by the Commerce Department.