It’s that time again! Tomorrow, the BEA will release the initial 2018Q3 GDP estimate. I’m particularly excited about this one because it will heavily determine whether or not Trump can achieve that elusive goal that Republicans so often loved to remind us that Obama could never reach: 3% GDP growth in a calendar year. I’ll first provide what the current major models are predicting, what I predict, and then walk through some scenarios to see how likely it is that Trump will get to 3% for 2018.
2018Q3 Major Model Estimates as of 10/25/2018:
Atlanta Fed [1]: 3.6%
NY Fed [2]: 2.13%
Moody’s [3]: 3.3%
Looking at other forecasts, consensus seems to be around 3.3% for Q3. For Q4, it looks to be about 3.1.
Adroit’s prediction: 3.1%
Oh man, pretty solid numbers! So that’s 2.2, 4.2 and possibly 3.3 for the first three quarters. So what does the economy have to achieve for that coveted 3%? Let’s see: there are four quarters in a year and we kind of have an idea of what three of those quarters are. To get 3% for the year (well, we’ll go with 2.95 because they round up to one digit after the decimal for these types of announcements), we do:
2.95 * 4 = 11.8
11.8 - (2.2 + 4.2 + 3.3) = 2.1
Trump would just need 2.1% for Q4 to achieve what Obama never could!!!
But not so fast. That’s not how annual GDP growth is calculated.
That’s right, annualized GDP is calculated by doing the following:
A = average GDP over the previous year’s four quarters, chained 2012 dollars
B = average GDP over this year’s four quarters, chained 2012 dollars
C = the difference between the two averages (B - A)
Annual GDP growth = C / A
Well, how do those quarterly GDP numbers come in to play then? Let’s take a look:
| Quarter | GDP | Quarterly Change | Quarterly Growth |
|---|---|---|---|
| 2017Q1 | 17863.023 | 78.838 | 1.79% |
| 2017Q2 | 17995.150 | 132.127 | 2.99% |
| 2017Q3 | 18120.843 | 125.693 | 2.85% |
| 2017Q4 | 18223.758 | 102.915 | 2.33% |
| 2018Q1 | 18323.963 | 100.205 | 2.22% |
| 2018Q2 | 18511.576 | 187.613 | 4.16% |
The quarterly growth percentages basically represent the following:
If the economy grew by the Quarterly Change amount for all 4 quarters this year, we’d have this much annual GDP growth.
For example, the annual GDP growth for 2017 was 2.2%, but if you take the average of those 2017 quarterly figures, you get 2.49%. Because remember, to get the annual growth, you have to take C from above and divide by A.
So what does C have to be for 2018 to get 2.95% (i.e. 3%) growth? Well, let’s calculate A:
A = (17863.023 + 17995.150 + 18120.843 + 18223.758) / 4
A = 18050.6935
C = 0.0295 * A
C = 532.49545825
Ok, so that’s our magic number for 2018. Let’s say we go with the Atlanta Fed’s prediction of 3.6% for Q3. That would mean we’d have a Q3 Quarterly Change of 162.4562415 (A * 0.036 / 4) or a Q3 Quarterly GDP of 18674.0322415. What do we have to achieve in Q4 to get to 2.95?
A = 18050.6935
C = B - 18050.6935
532.49545825 = ((18323.963 + 18511.576 + (18674.0322415) + (18674.0322415 + x) / 4) - 18050.6935
18583.18895825 = (18323.963 + 18511.576 + (18674.0322415) + (18674.0322415 + x) / 4
74332.755833 = (18323.963 + 18511.576 + (18674.0322415) + (18674.0322415 + x)
149.15235 = x
If we have 3.6% in Q3, we need a Quarterly Change of 149.15235 in Q4 to get 2.95% annual growth. That comes out to be 3.31% growth required in Q4.
Let’s go with the consensus of 3.3% in Q3. We’d need 3.91% in Q4 to reach our 2.95%.
Let’s go with Adroit’s prediction of 3.1% in Q3. It jumps up to 4.31%.
What say you? What do you think Q3 will bring in and what are the chances that we’ll achieve 3% annual growth this year?
