Market Minute: Negative 1Q GDP Forecast?
Last week, the market experienced a whirlwind of turbulence, with stocks moving lower for four consecutive days and economic data signaling signs of weakness. This weakness appeared across various indicators, from sentiment data like the Conference Board Consumer Confidence dataset to unemployment claims reported on Thursday.
The market remains on edge regarding consumer spending and whether it can sustain a healthy pace. However, on Friday, a broad range of economic data provided a more complex picture. The PCE price index came in as expected, showing a 0.3% month-over-month increase for both Core PCE and Headline PCE. Year-over-year, core inflation decelerated to 2.5%, down from 2.6% in the previous month.
But the most surprising update on Friday, which largely flew under the radar, came from the Atlanta Federal Reserve. The Atlanta Fed updated its GDPNow forecast, and the news wasn't encouraging.
On Friday, the Atlanta Fed's GDPNow model estimated 1Q GDP at -1.5%, a significant downward revision from the previous estimate of 2.3%. This sharp adjustment reflects newly released economic data, which led to a major recalibration of the forecast. One key factor was Personal Spending in January, which contracted by -0.2% month-over-month, raising concerns that consumers may be pulling back on spending. However, due to several weather events and natural disasters in January, the market is largely discounting this dataset.
One note: GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model.
On the other hand, Personal Income saw a notable increase of 0.9% month-over-month. With personal spending declining while income rises, the savings rate also increased. This trend further fuels concerns that consumers may be shifting toward a more cautious approach, potentially slowing overall economic growth.
The sharp downward revision in the 1Q GDP forecast highlights growing concerns over economic momentum, particularly regarding consumer spending. While inflation data remained in line with expectations, the contraction in Personal Spending and the rise in savings rates suggest that consumers may be becoming more cautious. Although weather-related disruptions may have played a role in January’s weaker data, the broader trend points to potential headwinds for economic growth. As new data emerges, market participants will closely monitor whether this slowdown is temporary or indicative of a more sustained downturn.
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