My 2007 Q4 GDP prediction is growth of 3.5%

Although the Q4 GDP report does not come out until the end of January 2008, and is therefore an "event" that happens in 2008, it feels more as though it is a 2007 event that is happening right now. Some people had been forecasting that Q4 GDP would come in at 1% or less, but then consumer spending came in fairly strong for November, on top of a decent gain in October as well, so now all bets are off. Some are now forecasting Q4 to come in at 2.5%, while some continue to claim that a recession has already begun.

To repeat, both the October and November readings for personal outlays were quite decent, and as we are continually told, consumer spending is 70% of GDP.

Of course, December is a real wild card and there have been a lot of reports that holiday spending is "off" or "weak." Please note that some are asserting that holiday spending is down due to high gasoline prices, but retail gasoline expenditures do really count as consumer spending in GDP. The bigger issue might be whether heavy discounting merely shifted a heftier chunk of holiday spending from December into November and even October.

The other big wildcard is the level of inflation in Q4. I would note that despite the sharp rise in the price of crude oil, retail gasoline prices have not reflected the full gains in crude oil prices. As with consumer spending, we do not yet have a clear reading on how inflation will play out in December.

I am going to conjecture that nominal annualized GDP growth for Q4 will come in between 5% and 8%, with 6.5% being a likely midpoint.

I am going to conjecture that (headline) inflation will come in between 2% and 4%, with 3% being a likely midpoint.

Subtracting inflation from nominal GDP, that gives a range for annualized real GDP growth in Q4 between 1% and 6%, with 3.5% being a likely midpoint.

So, my forecast for Q4 2007 is that nominal GDP growth will come in around 6.5% and inflation around 3%, so that my forecast for annualized real GDP growth for Q4 2007 is around 3.5%.

That is a fair bit higher than most forecasts, but it is what it is and was based on two realistic forecasts for nominal GDP growth and inflation.

OTOH, even my optimistic 3.5% gain is still a significant slowing from the 4.9% growth rate seen in Q3.

Meanwhile, even as the prospects for Q4 continue to improve, the cynics are simply shifting their game and are now talking about Q1 or Q2 as when the "real" slowdown will occur.

-- Jack Krupansky