Is the US economy heading for recession?
Ahead of the release of US first quarter GDP growth, we examine whether the weak growth that is widely expected is a signal of an impending recession or whether it is a mere seasonal blip.
With the Federal Reserve Bank of Atlanta’s GDPNow model pointing to growth of just 0.6% saar* for Q1 2016, the US economy looks set to have experienced yet another poor first quarter.
Historical comparisons, however, suggest that we need to be mindful that this could be a quirk of the seasonal adjustment process rather than a sign of an imminent recession.
How does Q1 2016 compare to previous years?
The tendency of late for Q1 economic growth to be weaker on average than the following quarters has been blamed on several factors, including abnormally poor weather and West Coast port strikes, for example.
However, while these factors surely had some influence on the US economy at the time, it is apparent that over a longer-term horizon, the same trend of a weak first quarter plays out, as can be seen in Chart 1 below.
Between 1986 and 2015, real GDP growth for Q1 averaged 1.78% compared to 2.86% across Q2, Q3 and Q4.
Figure 1: Average quarter-on-quarter US real GDP growth rate (saar)
Source: Thomson Datastream, Schroders Economics Group. Updated 18/04/2016
Is seasonal adjustment adversely impacting Q1?
While the Bureau for Economic Analysis (BEA) conducts its own seasonal adjustment to real GDP, the noticeable difference in the average growth rate in Q1 compared to the following quarters suggests there is a degree of additional seasonality in the official data, known as residual seasonality.
After all, first quarter seasonally adjusted real GDP growth should not be consistently higher or lower than growth in any other quarter. However, applying a second round seasonal adjustment to real GDP enables us to adjust for this potential residual seasonality.
Chart 2 below displays the difference between the original series and the seasonally adjusted original series over the last 30 years.
Figure 2: Residual seasonality of US real GDP growth (official series - seasonally adjusted official series)
Source: Thomson Datastream. Schroders Economics Group. Updated 18/04/2016
The data show that the growth rate for the first quarter of the year is often higher once the additional seasonal adjustment is made, with an average positive adjustment of 0.84 percentage points since 1986.
Conversely, real GDP growth in Q2, Q3 and Q4 is often lower after attempting to remove the residual seasonality.
No looming recession
Despite the likelihood that extreme weather has weighed on Q1 US GDP in recent years, this analysis and historical data would suggest the seasonal adjustment made by the BEA is having an excessive dampening effect on reported first quarter growth.
Should US real GDP growth turn out to be weak in the first quarter of 2016 as widely expected, this should not be interpreted as a sign that a recession is on the cards.
It is more likely to be a peculiarity of the seasonal adjustment process than anything more fundamental.
* Seasonally adjusted annual rate - A rate that is adjusted to take into account fluctuations of values in the data which might occur due to seasonality.
** Residual seasonality - the manifestation of seasonal patterns in data that have already been seasonally adjusted.
The views and opinions contained herein are those of Schroders' investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.'s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.