Is The GDPNow Nowcast For The Second Quarter Overstated?
I had a conversation with GDPNow creator Pat Higgins on the difficulty of making estimates.
GDP for the first quarter dipped to -0.3 percent on a surge in imports. Real final sales, was a horrendous -2.50 percent.
Real Final Sales is the bottom-line estimate of the economy. The difference between the base forecast and RFS is change in private inventories (CIPI) that nets to zero over time.
As noted on April 29, The Final GDPNow GDP Forecast for 2025 Q1 was -1.5 Percent
The GDPNow RFS forecast was -1.8 percent, closer to the mark but too high by 0.7 percentage points.
In contrast the GDPNow base forecast was too low by 1.2 percentage points.
Those are unusual misses after doing exceptionally well with the Nowcast for many quarters.
But the model was very close on Real Final Domestic Sales and Real Final Private Domestic Sales.
GDPNow Final Forecast vs Actuals 2025
GDPNpw was very close on real domestic sales, just not all sales.
My Question to Pat Higgins
Hi Pat
GDPNow was amazingly close on real domestic final sales and real private domestic final sales but not base GDP or total real final sales.
Do you have an explanation and does this portend any discrepancies for Q2?
Thanks
Mish
Reply from Pat Higgins
Note: This conversation occurred on June 4 and is a bit out of date but the principles apply.
Hi Mish,
I can’s say too much other than point you to my macroblogs on Challenges in Forecasting GDP Growth Last Quarter and This Quarter. There were some upward adjustments to March inventories that the BEA made to nondurable manufacturing inventories in the second GDP release and merchant wholesale trade inventories in the first one that GDPNow wouldn’t have captured.
Here are the related excerpts from the GDP Preliminary Release.
Within investment, an upward revision to private inventory investment primarily reflected an updated BEA adjustment to Census Bureau book value data to account for notable increases in imports. Updated and newly available information on the industries impacted the adjustment and led to an upward revision to nondurable goods manufacturing (specifically, chemical manufacturing) that was largely offset by a downward revision to nondurable goods wholesale trade (drugs and sundries).
Here are the related excerpts from the GDP Advance Release.
The largest contributor to the increase in investment was private inventory investment, led by an increase in wholesale trade (notably, drugs and sundries). The estimates of private inventory investment were based primarily on Census Bureau inventory book value data and a BEA adjustment in March to account for a notable increase in imports.
I mention the possible implications for GDPNow’s inventories forecasts in the second quarter GDP release in the second macroblog.
It’s unclear whether the reverse phenomenon—spending on goods drawn from inventories that are not accounted for in the published Census Bureau inventories data—can or will occur.
But we can anticipate that it is likely that either the BEA’s estimate of inventories contribution to first-quarter GDP growth will be revised down or GDPNow’s projected contribution of it to second-quarter GDP growth will be revised down on June 27.
Until June 27, GDPNow will make its own calculation of first-quarter CIPI in GDP using Census Bureau data on the book-value of inventories and BEA data for the remainder of the CIPI related data. This is because using Census Bureau book-value data usually generate virtually the same CIPI estimate for the prior quarter as what one would get using only the BEA data immediately after the GDP release. This allowed the model to anticipate BEA revisions of CIPI for the prior quarter in second and third release GDP estimates after Census Bureau revisions to monthly inventory book values.
However, GDPNow currently calculates a first-quarter annualized CIPI of $94 billion in 2017 dollars, while the BEA calculated it as $140 billion. [Mish Note: That difference accounts for the big GDPNow misses. As of June 18, the GDPNowcast of CIPI is little changed at $97 billion].
With respect to the July 30 2025:Q2 GDP release, 2025:Q1 CIPI will be “frozen” at the level published in the June 26 GDP (third) release estimate. So GDPNow would switch to the temporarily “frozen” BEA estimate on June 27. [Mish Note: Frozen means until annual revisions]
If both GDPNow and the BEA estimates for CIPI remain at their current, but different, estimates through June 26, the GDPNow switch to the higher 2025:Q1 value for CIPI would reduce its topline nowcast by 0.8 percentage points on June 27.
Historically GDP nowcasts tend to be less accurate when forecaster disagreement is high.
Forecaster Disagreement Is Still High
Since June 1, the GDPNow nowcast declined from 4.6 percent to 3.8 percent.
The Blue Chip Forecast rose in late May to a high of under 2.0 percent. Assuming a similar direction to GDPNow, the Blue Chip estimate may be more like 1.5 percent.
Subtracting 0.8 percentage points from GDPNow would yield 3.0 percent, still a big gap.
Looking Ahead
We cannot ignore the data between June 18 and June June 27, except there was very little of it, so far. Housing starts were miserable, but that report was on June 18 and is reflected in the charts.
On June 26, the Commerce Department reports durable goods and the BEA reports the “final” (until annual revisions) GDP for Q1.
Also on the 26th, we have International Trade in Goods. That’s the report that sent everything haywire in Q1 then caused the spike higher in Q2 on the lead chart.
The Bloomberg Econoday Consensus trade estimate is $-90.7 Billion in a wide range of $-93.0 billion to $-70.0 billion.
What matters is what happens vs the model expects. I highly doubt the model expects a deficit of a mere $70.0 billion. Should that happen, I believe GDP estimates would soar.
In contrast, I suspect a deficit over $90.0 billion would likely to be negative to the model.
Key reports on the 26th plus Personal Income and Outlays on the 27th will heavily influence the forecasts. GDPNow on the 27th will reflect Personal Income and Outlays.
The Bloomberg Econoday range of Personal Consumption Expenditures is -0.2 % to 0.4 % with a consensus of 0.2 percent. That seems high given a dismal retail sales report for May.
However, it not the consensus estimates that matter. It what the model expects that matters.
Big thanks to Pat Higgins for his time.
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