America’s largest banks and its central bank don’t see eye to eye on the economy.
Wall Street is just more optimistic than the Federal Reserve.
The Atlanta Fed projects the economy will grow 2% in the second quarter. But Barclays economist Jesse Hurwtiz is predicting 3%, Bank of America Merrill Lynch economists forecast 2.5%, and other big banks’ estimates hew closer to theirs.
Why the gap?
Wall Street economists point out that the key difference is that the Fed’s economic growth tracker, run by the Atlanta Federal Reserve, is based on past performance. But estimates at the big banks are based on projections.
“There’s a pretty big gap between the Atlanta Fed and most economists on Wall Street,” said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch. The Fed’s tracker, “tends to extrapolate recent trends into the next quarter.”
Wall Street believes that Americans have been spending more in the spring into the summer, which will help boost the economy in the second quarter.
“We see a bounce back in the consumer,” Hurwtiz of Barclays said.
The results from the past have been a bit of a mixed bag.
Some banks are beating the Fed. For instance, Bank of America’s quarterly GDP estimate has been closer to the official number three of the past four times.
However, the Fed’s tracker was much closer to the real number than Bank of America’s for the first three months of the year.
The Atlanta Fed declined to comment on its GDPNow forecast.
Harris, the Bank of America economist, says the Fed’s tracker is a good model, but it’s not better..
“That was like a Little Leaguer hitting a home run in a way — they just happened to have a great quarter,” says Harris. “It’s a nice little model but it’s not any better than what we do.”