Squaring the circle

The US economy is barely expected to grow in Q1 2016. Yet seasonal patterns continue to distort the data. Q1 growth is usually UNDERestimated by 1.25% while Q2 is OVERestimated by 0.8%. So could we see a sharp swing in growth expectations and investor sentiment in coming months?

My son enjoys playing a 'secret agent' maths game on Gridclub. He has to solve a number of puzzles to crack the code. It involves pattern recognition. The example below shows he has to work out that the numbers are declining by nine each time.

 

There is also a simple shape pattern: diamond, square, circle. I find these patterns too elementary and wish there were more numerical patterns for him to crack. But my son loves them and starts identifying similar patterns in the world around him.

Perhaps the statisticians at the BEA need to take such an elementary approach to mathematics when calculating the US GDP reports.

Our analysis suggests Q1 GDP growth is still underestimated by around 1.25% and Q2 overestimated by around 0.8%.

US GDP for Q1 is currently tracking around 0.5% annualized, i.e. barely growing. This is in contrast to buoyant labour market data. As labour market data lag real GDP data by around a quarter, this in itself isn’t much comfort. But we note that US GDP data continue to be affected by seasonal-adjustment problems. This was flagged up by regional Fed researchers a year ago and the statisticians promised to fix it in July 2015.

 

But the pattern of weak Q1 GDP data and stronger Q2 remains. Our analysis suggests Q1 GDP growth is still underestimated by around 1.25% and Q2 overestimated by around 0.8%. So even if the underlying economy remained unchanged at 1.5% in both quarters, growth would swing from 0.3% to 2.3%.

 

This could cause a similar swing in investor sentiment. For example, there is currently only a 50% chance of another Fed hike priced in this year. Interest-rate expectations could increase if GDP growth data recover as we expect.

 

 
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