by Calculated Risk on 11/20/2020 11:17:00 AM

Most economists are revisiting their Q4 forecasts, and many are not releasing weekly updates.  In their previous forecasts, many assumed some additional disaster relief in Q4, and many underestimated the current surge in COVID.

Depending on further delays in disaster relief, and the impact of the current COVID surge, we might see some significant Q4 GDP downgrades soon.   

It appears activity was solid in October, and that would suggest PCE growth of close to 4% in Q4, even if November and December see no month-over-month growth.  No one expects a lockdown like at the end of March and in April, but it is possible that activity will decline in December.

It is also possible Q1 will start very weak.   Merrill Lynch economists noted this morning: 

"We estimate that the expiration of federal UI programs—PUA and PEUC—alone could be a drag of 1.5pp in 1Q. Cutoff of other provisions will be added headwinds at the start of the year."

The high level of uncertainty over the next few months makes forecasting extremely difficult. The automated approaches (below) do not capture this uncertainty.

From the NY Fed Nowcasting Report

The New York Fed Staff Nowcast stands at 2.86% for 2020:Q4. [Nov 20 estimate]

And from the Altanta Fed: GDPNow

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2020 is 5.6 percent on November 18, up from 5.4 percent on November 17. [Nov 18 estimate]

It is also important to note that GDP is reported at a seasonally adjusted annual rate (SAAR).  A 3.3% annualized increase in Q4 GDP, is about 0.8% QoQ, and would leave real GDP down about 2.7% from Q4 2019.

The following graph illustrates this decline.

Click on graph for larger image.

This graph shows the percent decline in real GDP from the previous peak (currently the previous peak was in Q4 2019).

This graph is through Q3 2020, and real GDP is currently off 3.5% from the previous peak.  For comparison, at the depth of the Great Recession, real GDP was down 4.0% from the previous peak.

The black arrow shows what a 3.3% annualized increase in real GDP would look like in Q4.