29 02 2016

Wall Street starts cutting back growth outlook

Enthusiasm for stronger-than-expected growth to close out 2015 didn't last very long.

Revised fourth-quarter calculations showed gross domestic product increased 1 percent for the period, by itself a moribund level but looking better when compared to the original estimate of 0.7 percent and Wall Street expectations for something close to 0.4 percent.

The details behind the numbers, however, showed that the upward revision didn't come from unexpected growth. Instead, the rise in the GDP calculation occurred in large part because a sizable inventory build didn't wear off as quickly as anticipated. Inventories helped boost GDP in 2015 and ultimately kept the fourth quarter out of contraction.

What's left, then, is a quarter ahead that will feature less inventory build. In the formula the Bureau of Economic Analysis uses to calculate GDP, that means the period likely will be less robust as that inventory wears off.

Consequently, some Wall Street forecasters dimmed their outlook for the first quarter.

Goldman Sachs led the move by cutting its Q1 GDP projection from 2.3 percent to 2 percent. The Fed's Atlanta branch followed close behind, with its GDP tracker now seeing 2.1 percent, down sharply from Thursday's 2.4 percent, citing a 0.4 percent decline in inventory investment from the fourth quarter that will bleed into 2016's first three months.

The reductions come amid mixed signs for growth and increasing worries that both the U.S. and global economies could slip into recession. For instance, JPMorgan reported this week that while it sees a one-third chance for recession this year, consecutive quarters of declines in U.S. corporate profits, as is currently the case, have foretold recessions 81 percent of the time for the past 115 years.

Others could follow suit in reducing expectations.

Bank of America Merrill Lynch actually raised its estimate after Thursday's strong durable goods report, from 2.5 percent to 2.7 percent, but may want to take another look. Barclays said the GDP report would not cause it to change its estimates, but the firm was at an already-subdued 2.1 percent. The CNBC/Moody's Analytics GDP Survey has the current median estimate at 2.3 percent.

"We'll take a better-than-expected GDP figure for Q4, but the unexpected lift in inventories relative to the first print may lead to a reduction in Q1 estimates for the sole reason of mean reversion in this category," Peter Boockvar, chief market analyst at The Lindsey Group, said in a note. "Either way, GDP growth in 2015 averaged just 1.9 percent and we don't expect an improvement in 2016."