Hotlanta crushes NY Fed on GDP outlook

THE New York

Fed loses. And, unfortunately, so does anyone who had the slimmest of hopes that the US economy was getting better.

On Friday, the Commerce Department announced that the economy in the first quarter of 2017 flopped.

The nation’s GDP rose at an annual rate of just 0.7 percent in the first quarter of President Trump’s inaugural year. That was the slowest pace in three years and defied the notion the improvement in consumers’ moods would translate into increased spending.

As I wrote on March 23, the New York Federal Reserve Bank and its Atlanta counterpart had two different views of Q1 based on their respective econometric models.

The Atlanta Fed’s GDPNow model was then forecasting an 0.9 percent annual growth rate in Q1 while the NY Fed’s Nowcast model had the economy growing at a somewhat vigorous 2.8 percent pace.

Since I wrote that column, the Atlanta Fed had lowered its growth forecast to 0.2 percent, which coaxed some Wall Street firms to adjust their projections down to near that level.

The NY Fed’s projections, however, stayed overly cheery. Its final forecast before the actual announcement Friday still expected growth at a 2.7 percent annual rate.

The NY Fed is also predicting some bounceback in the second quarter with growth of 2.1 percent. Even if the NY Fed is correct about Q2, the firsthalf growth — the actual number released Friday plus the projected second-quarter growth — will put the first half of 2017 at only a little better than 1 percent annual growth.

The NY Fed wouldn’t say what went wrong. But that’s an important question.

Not all the Fed’s banks are equal. The NY Fed’s proximity to the financial markets and its dealings with interest rates via its trading desk make it the premiere one. And NY Fed President William

Dudley has a permanent seat on the Federal Open Market Committee. All of the other Fed bank presidents rotate on the policy-making committee.

That makes the current situation very interesting. The Fed has already raised interest rates twice in recent months and has been indicating that there will be more — perhaps as many as three more increases this year.

While that might have made sense under the New York Fed’s view of the economy, it is ridiculous if 2017 GDP growth continues to crawl along.

The first quarter’s 0.7 percent annualized growth is one-third of the growth in Q4 of 2016, which was probably helped by election spending. The party in the White House typically ups government spending to retain power. And both parties throw money around for the actual campaign.

The 0.7 percent annual growth announced Friday, was lower than the 1.2 percent consensus among Wall Street economists polled by Reuters. That was partly the result of lower defense spending. But the economy should have been helped in Q1 by nice weather. Winter job growth was stronger than expected because employers hired months ahead of schedule for outdoor jobs, leaving March’s job number at 98, 000.

Next Friday, Labor will announce April job growth, and it could be better than the slow GDP would indicate, but mostly due to technical adjustments.

The weak GDP comes at a good time for the White House, which gave the bare bones of a tax reform package this week that it hopes will get the economy growing at 3 percent annual ly. That is optimistic, especially since the tax plan is no sure thing.

The Atlanta Fed doesn’t have a forecast yet for Q2, but I’ll put my money on the Atlanta view.