In Advance Of Q2 US GDP Release, Forecasting Economists Race To The Bottom

"Sluggish," according to Eric Lascelles, chief economist at RBC Global Asset Management, is a word economists like using to describe the rate of economic growth in the United States as of late. "Frankly disappointing" and "not optimal," Lascelles notes, also get the point across.

But given current dynamics, where the more data market-watchers see on the economy, the less they like what they see, "ugly" might be a better fit.

Specifically, predictions by professional economists on what the government might report as the rate of GDP growth in the second quarter of 2012 have plummeted in the past few weeks, as they've rushed to adjust their models to digest one disappointing data release after another.

First the facts: When the Bureau of Economic Analysis announces its "advance" reading of U.S. GDP growth for the April-to-June 2012 period on Friday, economists surveyed by various large news organizations, on average, predict the headline figure reported by the government will be 1.4 percent. That's the median number in a Bloomberg News survey of 80 economists, arguably the most widely followed forecast. A similar survey of 74 economists by Thomson Reuters is slightly more optimistic, at 1.5 percent.

The facts, however, don't tell the entire story.

The 1.4 percent median figure in the Bloomberg survey, for example, was 1.5 percent just a week ago. A week before that, on July 11, it had stood at 1.8 percent, a number that was itself a drop from the 2.1 percent estimate recorded in the first week of July.

The steady drop in the number has paralleled almost-hyperactive updates to the "tracking" GDP prediction models used by various bank economists. At Goldman Sachs, for example, chief U.S. economist Jan Hatzius has slashed the firm's second-quarter GDP growth forecast by nearly half, from 2.1 percent to 1.1 percent, over the course of six weeks. Bank of America economists, for their part, are also targeting a 1.1 print, down from 2.4 percent earlier in the year.

As economists at that latter bank explained in a mid-July note to clients, the race-to-the-bottom for GDP expectations has mirrored a series of disappointing data releases on major economic indicators.

"Data releases continue to come in below an already beaten-down consensus," analysts wrote, explaining that, even though the weather-linked distortions that were blamed for weak numbers in the late spring were no longer a factor, 22 out of 30 important indicators tracked by the bank in June had surprised to the downside. "Moreover, the weakness is not concentrated in second-tier data: the big three of payrolls, retail sales and the ISM have all been weak."

"Why are the recent data so weak? In our view, it is mainly a matter of confidence. The last several years have featured a number of false dawns. Each time the US economy looks better for a while, economists boost their numbers and start taking about 'take-off speed,' only to see growth falter. Similarly in Europe, each time a new rescue plan is announced there is a period of optimism in the markets, only to see the crisis pop up again. This long string of false dawns is slowly eroding away confidence in the recovery," the analysts added.

The decrease in GDP expectations at Goldman is indicative of what the Bank of America analysts pointed out. The investment bank's economics team first cut second-quarter GDP predictions from 2.1 to 2.0 percent on June 4, following what it called a "modest negative" April factory orders report. "Weaker-than-expected" export growth in April, reported on June 8, saw the bank slash GDP expectations further by two-tenths of a percentage, to 1.8 percent. Goldman adjusted its model down to 1.6 as the month went on, cutting it to that level following a weak June 16 retail sales report, raising it back on better than expected first quarter GDP numbers a few weeks later, then cutting again following a "soft" consumer spending report June 29. The team then slashed another .1 percent on July 3, on the back of another "slight negative" factory orders report. July 11 saw the bank cut its forecast twice, on negative trade deficit and wholesale inventories reports. A "negative for our tracking estimate" July 16 retail sales report -- which generally seemed to jolt Wall Street economists even more than other disappointing data releases -- was the final straw, pushing Goldman to cut its forecast to 1.1 percent.

That same day, Deutsche Bank lowered its GDP prediction to 1.0 percent, from 1.4. Japanase financial zaibatsu Nomura dropped its own view by 10 basis points to 1.2 percent. And economists at HSBC concluded consensus views would shift to "1.5 percent or less."

That type of movement in predictions does not surprise Lascelles, the RBC economist, who is targeting annualized GDP growth of 1.5 percent and describes his forecasting stance as that of "the world's most pessimistic optimist."

"The defining theme of the last four-plus months has been disappointment in economic data," Lascelles said. "We're clearly in a negative surprise period. It's consistent with the softening in the financial markets that we've seen. It struck us in the winter and early spring that the data was unsustainably strong, and it is probably unsustainably weak right now. The reality is probably somewhere in the middle."

Not everyone holds such offsetting views of the positives and negatives likely pushing GDP growth.

Matt Ballew, founder and chairman of Security Ballew Wealth Management in Jackson, Miss., says that "simply put, we just have a lot of uncertainty in this country" that is dragging down GDP growth, without counterbalancing positives.

"We have the election issue, we have the fiscal cliff, and all that constrains businesses from making important decisions," Ballew notes, adding he also believes the high level of private and public indebtedness and lagging global trade are taking a toll on efforts to stimulate the economy.

Ballew, who sees GDP growth "somewhere in the ballpark of 1 percent" for the second half of 2012 says that "ungrounded bullish outcomes" are being predicted by economists and analysts who say "this is what we're going to get, because it's always been true, ever since the '80s," but that "we're going to see outcomes that we haven't seen since the '30s."

"I wish I could talk to analysts that have these high expectations of what's coming. I don't know how they get there," he said. "I don't see what's holding the whole thing up now."

Indeed, a look at the recent mood shift in insider opinions on the "micro" side of the economy, based on the performance of specific companies, seemingly adds weight to those more bearish views. A July 20 Goldman Sachs analysis of financial results recently reported by S&P 500 companies -- the vast majority of who are accounting for an April to June period -- found 31 percent missed Wall Street revenue estimates, a worrying sign economic demand was generally slower than equity analysts had expected. In response, those stock market experts have slashed revenue expectations for the rest of the year.

As for another consensus survey number that seems to be having trouble holding up in July...