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Inventories a GDP Wildcard: Email Exchange With Pat Higgins

About 1 million cars were damaged by recent hurricanes. Inventory was wiped out at some dealerships. Inventory replenishment is up, and not just for autos. This poses a problem in forecasting third-quarter GDP. Did the change in private inventories (CIPI) rise or fall?

I posed this question to Pat Higgins, creator of GDPNow, about a week ago.

Hi Pat, can you shed any light on CIPI? Manufacturers are ramping up to catch up with what was destroyed in the hurricanes. From a practical standpoint, is it likely your model is overstated? If so, how much? Is it possible for you to discuss this idea?

Response From Pat Higgins

Hi Mish, I can’t really say if the model inventory forecast is likely to be overstated or understated. This macroblog is a little dated, but its table shows that “final” inventory forecasts are the least accurate amongst the subcomponents (although net exports was almost the same). I haven’t looked at whether instances where the inventory contribution to growth forecasts have been high (or low) have tended to be instances when the forecasts were too high (or low). You are correct on one point – looking at the forecast details in the tab “Inventories” – the model is expecting most of the gain in inventory investment to come from manufacturers and wholesalers with some offset from auto dealers. The Blue Chip Economic Indicators has a recent forecast of inventory investment for the third quarter. Unfortunately, I can’t quote that number since it’s not in the public domain. You may be able to find some inventory forecasts from private forecasters, but I can’t really point to those. Sorry I can’t be of more help!Pat

CIPI Forecast

At the time I posed the question, the GDPNow forecast for CIPI looked as follows.

Nearly 1 full percentage point of the GDPNow forecast went to CIPI at the time I emailed Higgins.

Since then, the GDPNow contribution for CIPI rose to 1.01 on October 25 and fell to 0.80 following today's advance indicators from the Census Department.

GDPNow Current Estimate

Pat Higgins writes: "The final GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2017 is 2.5 percent on October 26, down from 2.7 percent on October 25. The forecast of the contribution of inventory investment to third-quarter GDP growth declined from 1.01 percentage points to 0.80 percentage points after this morning's Advance Economic Indicators report from the U.S. Census Bureau."

Nowcast

The Nowcast as of one week ago stood at 1.46%. It's likely, but not certain that today's advance numbers would have taken a tick or two off the Nowcast forecast. We find out tomorrow.

I will estimate the Nowcast final estimate at 1.24% rounded to 1.20%

If so, that is 1.2% vs 2.5%. The difference currently stands at 1.5% vs 2.5%, a full percentage point gap.

Mish Estimate

I did not intend to make an estimate this quarter. The hurricane impact is a wild card and CIPI is an enormous wildcard.

In writing this post I decided to go with 1.75%. However, nothing will surprise me. My 90% confidence range this quarter is 0.5% to 3.0%. I took the average.

Mike "Mish" Shedlock

I will continue to forecast 1-2% annual growth in the US for the next few years; 2-3% for most other developed countries, and 3-4% for most emerging markets. If the US had more skilled labour to help rebuild after all the recent natural disasters, I would even forecast 2-3% in the US for the next few years. Steady as she goes now for 8 years and counting.

Actually, 1-2% isn't all that bad given the enormous amount of existing malinvestment that keeps gumming up the works.

Mish - I like your new format! On the GDP/hurricane issue, this illustrates both how the administration will twist this around and why this figure is not representative of growth, but just turnover financed by a drawdown in savings and new debt. FEMA spent $37B, insurers maybe $50B plus out of pocket expenses. Call it roughly $100B (conservative?). Annualized is $400 billion, which equates to 2.2% alone, which is really the amount of destruction caused by the storms. Assets were destroyed, replaced by inventory. Taking credit for this is like Trump insisting that his Renoir is not a fake!

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