GDPNow’s Q4 GDP forecast is highly questionable: Pantheon Macroeconomics

According to a new analysis by Pantheon Macroeconomics, the Atlanta Fed's GDPNow model’s 5.3% Q4 GDP growth forecast appears “overly optimistic.”

Samuel Tombs, the firm's Chief U.S. Economist, described this blockbuster forecast as “highly questionable,” citing significant limitations in the underlying data and methodology.

While the GDPNow model mechanically incorporates monthly data series that are reflected in official GDP reports, according to Pantheon Macroeconomics, this approach leaves “no room for wise judgment on quirks or underlying trends in the data.”

The company pointed out that the current forecast is based on extremely limited hard data, with almost no data available for December, very little for November, and significant gaps even in October. At this stage, prior to the preliminary Q4 GDP announcement, the average absolute forecast error for GDPNow has historically been 1.2 percentage points, and has reached as high as 3.6 percentage points.

According to Pantheon's analysis, GDPNow’s 3.1% growth forecast for consumer spending is described as 'particularly difficult to comprehend.'

Strategists noted that the model's prediction of a 1.8% increase in goods expenditure conflicts with their proprietary mapping based on November retail sales reports, as well as Bloomberg's Second Measure indicators. Both suggest 'flat growth' in goods spending.

Pantheon Macroeconomics also challenged the model’s forecast of a 3.7% rise in services spending, pointing out that all the high-frequency indicators it tracks—such as hotel occupancy rates, airline passenger numbers, and Google searches related to subscription service cancellations—suggest that services spending is 'losing momentum in Q4.'

The firm further emphasized major inconsistencies in GDPNow’s forecasts, noting that despite there being a historically reliable inverse correlation between net trade and inventory increases, the model assumes both a substantial 2-percentage-point contribution from net foreign trade and a 0.8-percentage-point contribution from inventories.

Pantheon Macroeconomics believes there is a 'much higher' likelihood of overall consumer spending increasing by 1.5–2% in Q4 compared to GDPNow’s 3.1% forecast. The firm’s current provisional forecast maintains GDP growth at 'approximately 1.5% for Q4,' but Mr. Toombs and co-author Oliver Allen expect additional data to be released in the coming weeks will 'bring GDPNow’s forecast closer to our projection.'