Someone’s Liable To Get Egg On Their Face
by David Reavill
This week Wall Street will have two of the most significant events of the financial year. On Wednesday afternoon, Jerome Powell will announce the latest interest rate move from the Federal Reserve. And before the ink is even dry, early the very next morning, the US Bureau of Economic Analysis will present its first estimate of the nation’s economic growth during the second quarter.
And standing on the sidelines, with breathless anticipation, will be hundreds of analysts, traders, and investment managers waiting, hoping that they’ve bet the right way. Anticipating this country’s financial direction.
It’s easy to think that a percent or two, one way or another, doesn’t mean that much. But if you believe that, you’d be very wrong.
Careers are built and sometimes lost on the ability to forecast our current economic vector. And currently, our economic direction is uncertain.
You’ll recall that when lat reported, the Bureau’s best measure was that this economy was declining during this year’s first quarter. That was especially significant, as just the quarter before, the fourth quarter of last year, the economy was growing at one of the fastest rates in decades. Ignoring the wild swings of the Pandemic, that fourth-quarter growth at nearly 7% was the best in 40 years.
Then boom, the air came out of our balloon. Suddenly, the first quarter showed economic contraction—the first step of a recession. Enormous growth then collapses to recession levels in back-to-back quarters. I don’t remember seeing that before.
And this wild up and down fluctuation makes this second quarter reading all the more critical. Hopefully, it will answer whether the economy has regained its equilibrium. But it isn’t going to be easy.
Already the two sides are beginning to form. Predicting economic growth is most on Wall Street, and most certainly the Federal Reserve, for reasons will get to in just a moment.
But there is another side to this equation. And on that side are most of the Wall Street Bears and an engaging new member, none other than the Federal Reserves’ own Atlanta Branch. Atlanta, you see, keeps an ongoing model of just where the economy stands, called the GDP Now Model.
Pretty accurate last quarter. Atlanta did show the economy contracting, one of the few who got it right. Once again, they are estimating that this economy is still contracting.
To give you the numbers. Wall Street estimates that the economy grew at half a percent, while Atlanta says it’s contracting at better than one and a half percent.
That’s a swing of over $400 billion in national income. And would make a real difference in earnings and revenues nationwide.
We’ll all know the answer to this puzzle of economic growth early Thursday morning when the BEA flashes its estimate across millions of screens worldwide.
For Wall Street, there will be the winners and the looser. Some will be elated, some crushed. That’s how it always is.
But there will be one group that will be particularly affected. Because just 18 hours before, from the Eccles Building in Washington DC, the Fed will have decided on their new interest rate policy. Based on their understanding of the strength or weakness of the economy.
Will they have raised interest rates too far in the light of this reading of GDP growth? Or will they be just right in raising rates against a moderately rising economy?
It’s an interesting question. And it will all play out in a moment of high drama, the interest rate decision Wednesday afternoon, the GDP announcement first thing Thursday morning.
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