1Q 2010 GDP Forecast: Get Ready for … 1%

Modeling GDP from the various information that is available shows that we are on track for a disappointment. Much of last quarter’s was due to a rise in inventories. Now we are seeing just the opposite and the calculation of GDP is going down accordingly.

It is becoming more likely that we will see a much lower print for the first quarter than the explosive and almost magical number that was presented (5.7%) for last. Below is the change in the calculation as according to Briefing as well as the methodology. Look closely at the revisions inventories that came from the latest economic releases.

According to Jeff Rosen at Briefing.com

Inflation Data Lowers Q1 GDP Forecast
Real GDP for Q1 2010 was revised down this week due to stronger-than-expected inflation data. Currently, we are forecasting a 1.0% increase to first quarter GDP versus a prior outlook of 3.0%.

We created a new model for forecasting motor vehicles inventories using motor vehicle assemblies as a key component. The model was added to our GDP tracker following the industrial production data release. As a result, the sharp decline in inventories cannot be associated with changes in the industrial production data.

The latest PPI data incorporated a new weighting measure for all its subcomponents. We expected weaker inflation growth using the older weights.

The changes to the PPI weighting system lowered our inventory valuation adjustment (IVA) estimate. It is highly likely the BEA will lower its IVA estimate in the next fourth quarter revision. If this happens, the difference between Q4 2009 and Q1 2010 inventories will shrink. As a result, our first quarter GDP will be revised higher.

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