Please ensure your seatbelts are securely fastened.

The Atlanta Fed maintains a running model of U.S. quarterly GDP. I don’t want to say that model flashed red, necessarily.

That model flashed bright red; -2.8% this quarter, bad.

Before putting that number into context, it is worth understanding the GDPNow model.

Built with available economic data as it is published, the GDPNow model provides one of the first looks at the economy's direction during the quarter. Sufficient data has arrived for the model to start doing its work roughly 60 days prior to the end of the quarter it is measuring.

That’s right. The GDPNow model starts producing quarterly GDP expectations almost two months before the quarter ends. As official data is released throughout the quarter, the GDPNow expectation continues to be updated.

As you could expect, the results can be quite volatile. Building quarterly estimates almost on a daily basis makes the model highly sensitive to the few inputs received early in the quarter.

As volatile and imprecise as this forward-looking model may be, it is also extremely transparent. As in: you can download the Excel file and see all inputs, measures, and factors.

So, we did. (You can too: GDPNow)

First, a comment on the model. It’s not perfect. Anyone who has worked with any good models would know that should go without saying, but we’ll repeat it here. It’s not perfect.

But it is incredibly transparent.

Using the model outputs available as of March 3 — 28 days prior to the end of the first quarter, the GDPNow outlook has turned decidedly negative. Plummeting from an expected growth of 2.3% in the U.S. economy as of February 26, it now shows an expected Q1 GDP of -2.8% five days later.

What changed?

Net exports fell sharply, along with residential investment and personal consumption expenditures.

Which leads to our first conclusion: things may not be as bad as they look.

The data most heavily impacting the model in these early iterations is import and export data. For a country leading into a potential trade war with threatened tariffs on top trading partners, these numbers are going to be wonky.

Consider a sharp rise in imports immediately before a very public threat of tariffs. It makes sense that companies would be front-loading any material they may need before the tariffs are put in place.

This makes sense and illustrates why the GDPNow model prioritizes transparency. The model was not built with the idea of a sudden economic shift with economic allies. But it hides nothing, allowing you to see how it retains its credibility and fidelity today, even if it results in volatile numbers.

Which leads to our second conclusion: things may be worse than they look.

Going back to 2014, we charted all GDPNow quarterly estimates as they progressed through the quarter. Only one quarter showed a sharper decline at any point during the quarter: Q2 2020.

The closest non-pandemic example was Q3 2022 when GDP expectations started around +2%, then slowly declined to near flat before plummeting to -2.1%. During that quarter, GDP ended around -1%, a reaction to the economic COVID whipsaw.

Even though today’s numbers are reacting, in part, to a sudden rise in imports, they are also reacting to a sudden drop in exports. Goods exports that were expected to be down 1.9% are now expected to be down 6.9%. The result is a $44 billion dollar swing in net exports.

Based on tariff threats, other countries are not buying U.S. goods as much as they used to. While this may only look like a U.S. problem, consider the countries to which these exports were headed. If this truly is the first hard data of an economic downturn, it will be global.

Speaking of model transparency, GDPNow also publishes its average historical error at each point in time prior to the BEA’s advanced GDP estimate. Based on the model's historical error, the average error is about 1.5%.

That can be quite a lot. But a 1.5 point improvement on -2.8% is still negative.

But margin of error works both ways. A 1.5-point overestimation on -2.8% is not good.

Not good at all.

We’ll leave you with the public service announcement first offered in our February 6 newsletter:

Visual Approach Public Service Announcement: Check your hedges, folks.

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