This Fed economic indicator looks pretty awful

Much of Wall Street had been looking for the U.S. economy this year to exceed 3 percent annualized growth for the first time since the Great Recession.

One Federal Reserve indicator, though, shows that assumption could be in serious jeopardy.

The Atlanta Fed each week publishes a rolling update of its gross domestic product projection for the quarter. Not so long ago, the GDP Now indicator, as it is called, was at least within shouting distance of Street expectations.

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However, a recent batch of weak economic data—with the notable exception of the monthly nonfarm payrolls report—has the indicator flashing danger signs. Citigroup's economic surprise index, for instance, has hit its lowest level since July 2012. (The index measures how the data fare against expectations.)

The most recent GDP Now print, updated Thursday, puts first-quarter GDP growth at just 0.6 percent. That's a sharp decline from the 1.2 percent expectation from just last week and well off the 1.9 percent projected in early February.

A factory worker moves finished transmissions for Chrysler vehicles at the company's Tipton Transmission Plant in Tipton, Indiana.
Luke Sharrett | Bloomberg | Getty Images
A factory worker moves finished transmissions for Chrysler vehicles at the company's Tipton Transmission Plant in Tipton, Indiana.

The trend is significant in that the Federal Open Market Committee—the central bank's policy making arm—is expected later this year to start increasing its target short-term interest rate. The FOMC is likely to deliver the first hint of a rate hike at its meeting next week when the word "patient" could be dropped from the policy statement it issues.

With annualized GDP now less likely to hit Wall Street expectations, the Fed may be pushed to rethink its rate intentions.

"Why some at the Fed are becoming so vocal over the imminent need of a rate hike is a bit surprising given the sharp Q1 slowdown we are seeing and inflation that is flat as a pancake," David Rosenberg, chief economist and strategist at Gluskin Sheff, said in his daily note Friday. "Maybe (Fed Chair) Janet Yellen has to come out and ... outweigh FRB regional presidents who choose to air their own individual policy views to the media."

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In February, the Philadelphia Fed put GDP estimates at 3 percent for the first quarter and 3.2 percent for all of 2015, numbers that the recent data suggest will be hard to hit. The U.S. grew at a 2.4 percent rate in 2014 and 2.2 percent in 2013.

One of the main problems has been consumer spending: Retail sales numbers have been awful since the 2014 holiday season, with consumers electing to put their substantial savings at the gas pump in their pockets rather than at shopping centers. That has occurred even as household worth grew to $82.9 trillion in the fourth quarter, according to data released Thursday.

One significant caveat with the Atlanta Fed tracking is that the data set only goes back to the 2011, and by the branch's own reckoning carries a significant margin of error—0.68 percentage points that the central bank officials say is improving with time and gets better closer to the release date.

In recent quarters, for instance, the GDP Now measure has tended to overstate the actual reading. December's official figure came in at 2.6 percent against a 3.5 percent GDP Now estimate. September's reading overshot by 0.8 percentage points and June's by 1.3 percentage points. March's estimate undershot the actual reading by 0.2 percentage points, and the previous December's was almost spot on with a 3.1 percent projection against a 3.2 percent actual reading.

The Bureau of Economic Analysis will issue its advanced reading on first-quarter GDP on April 29.

However, the Atlanta Fed reading, while the lowest of the bunch, reflects the general trend of economic outlooks at least for the first quarter.

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Earlier this week, Barclays cut its first-quarter estimate from 1.8 percent to 1.5 percent due to weaker-than-expected retail sales data for February. Moody's Analytics recently reduced its view from 2.2 percent to 1.7 percent, Rosenberg sees 1 percent growth, Bank of America Merrill Lynch on Friday reduced its projection to 1.9 percent, and Credit Suisse, also on Friday, slashed its projection from 2.5 percent to 1.7 percent.

"I have been bullish in recent years over the U.S. economic backdrop and remain bullish, but it must be acknowledged in this business of assessing probabilities and managing risk, that my confidence level in this view has diminished somewhat in recent months," Rosenberg wrote.