Fed Model Shows Strong Growth. Is Government Shutdown Distorting Data?

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Key Points

• The Atlanta Fed’s GDPNow model estimates a 3.9% annualized growth rate for the third quarter, but a government shutdown creates data gaps.
• Consumer spending grew 3.3% and private investment increased 4.4%, while government spending projections decreased to 1.5%.
• Economists express caution due to missing data and a weakening labor market, with the unemployment rate at 4.3% in August.

The Atlanta Fed’s closely watched GDPNow model shows the U.S. economy surging ahead at a 3.9% annualized growth rate for the third quarter of the year, a strong reading that conflicts with some expectations of an economic slowdown.

But the government shutdown has created a significant data blackout that may be distorting the picture. A weakening labor market may also drag gross domestic product down further than estimates show.

Investors are betting on interest rate cuts by the Federal Reserve next week, and say the odds of additional cuts in December, January, and March are rising. The market’s logic is based on new tariffs, stubborn inflation, and a cooling jobs market. Many economists share these concerns about growth going forward.

The latest economic data, however, shows considerable strength. The Atlanta Fed’s Oct. 17 update revealed consumer spending growth ticking up to 3.3% while private investment jumped to 4.4%. Government spending projections, meanwhile, decreased slightly to 1.5%.

The GDPNow model isn’t a forecast, it’s a real-time snapshot that continuously updates as new data becomes available. It provides a running estimate of quarterly real growth in gross domestic product ahead of the official data from the Bureau of Economic Analysis. The model calculates what GDP growth would be if measured today, using the same methods the Bureau of Economic Analysis employs for official figures. While it shouldn’t be mistaken for a prediction, economists view it as a reliable indicator of what’s to come.

But the government shutdown, which began Oct. 1, the same day the third quarter ended, has created a data gap. The GDPNow model relies on 13 different economic components to estimate GDP, mimicking methods used by the Bureau of Economic Analysis. Some of the data used to model those subcomponents is either unavailable or incomplete because of the shutdown, including official September retail sales figures.

This blackout has some economists questioning whether third-quarter estimates are too optimistic. Jan Hatzius, chief economist and head of global investment research at Goldman Sachs, wrote in a recent note that some GDP estimates for the third quarter may be too high because of the lack of government data. Employment numbers, he added, may also ultimately drag down economic growth.

“There are a few special factors complicating the relationship between GDP growth and job gains in the official data, including swings in imports and the coming downward revisions to payrolls,” wrote Hatzius. His team expects GDP growth in the third quarter to come in at a more modest 3.3%.

Other economists agree. “Payrolls tend to be a better guide to the economy’s true momentum than the timeliest estimates of GDP,” wrote Sam Tombs, chief U.S. economist at Pantheon Macroeconomics in a note Tuesday. “It makes sense, therefore, to stay focused on labor market indicators and assign less weight to the broader activity measures.”

The available data supports their caution. The U.S. unemployment rate reached 4.3% in August, up from 3.4% in the spring of 2023. Layoffs, meanwhile, are up 66% year over year and are the highest year to date since 2020, according to recent private data from Challenger, Gray, & Christmas.

Another potential distortion comes from tariff front loading. Businesses and consumers have been stockpiling goods to avoid President Donald Trump’s tariff policy, which Hatzius suggests may still be leading to inflated data and estimates.

The New York Fed’s GDP nowcast offers a more conservative picture, estimating third-quarter growth at just 2.3% as of Oct. 17. The bank acknowledges on its website that the “Nowcast is being published with limited data” and that “regular publication will resume with all data series once these data are available.”

Whether the economy is as strong as the Atlanta Fed nowcast suggests or heading for the slowdown markets anticipate remains unclear. The shutdown has left economists without essential tools, making it difficult to determine whether recent strength reflects genuine momentum or temporary distortions from tariff-driven stockpiling and missing data. ​​​​​​​​​​​​​​​​

The Federal Reserve meets on Oct. 29-30 when officials are widely expected to lower interest rates to between 3.75%-4.00%.

Write to Nicole Goodkind at nicole.goodkind@barrons.com