The plunge happened between June 24 and June 26, but the Atlanta Fed just posted results today.Nowcast PlungeJune 24: 3.1 percentJune 25: 2.5 percentJune 26: 1.2 percentEmail Exchange With Pat Higgin on June 25Hi PatHow much of today’s downgrade was a result of the upward revision to GDP by the BEA vs standard monthly economic reports?Can you parse the key reasons for the change a bit finer?ThanksMishPat Higgins ResponseHi Mish – essentially all of the decline in the change in GDPNow’s forecast from July 17 to today was concentrated in personal consumption expenditures (PCE), whose forecasted contribution to GDP growth fell 0.5 percentage points relative to the July 17th forecast. The BEA had released April PCE data late last month, so revisions to that month in addition to revisions to the Q1 data could impact the forecast.About 0.3 percentage points of the forecast decline in the PCE contribution to growth was concentrated in goods while the remaining 0.2 percentage points was concentrated in services. For goods, it appears that April’s real “Net Purchases of Used Motor Vehicles” was revised down 9.3 percentage points [not annualized] by the BEA relative to what was published a month ago. So, most of the forecast downgrade for goods appears to be related to this one revision.The model’s forecast for real services PCE decreased from 1.9 percent on July 17th to 1.4 percent today. The BEA revised annualized Q1 real PCE services growth from 1.8% to 0.5% today and there was a modest downward revision to the April/March growth rate as well. The downward revision to the monthly growth rates – if you keep the May and June growth forecasts fixed — would imply a 0.5 percentage point reduction in the model’s forecast for PCE services. This simplification doesn’t account for the model’s attempted anticipated revision [based on retail sales and international trade data]. But for most of the services basket, the model anticipates no revision by construction. So, the downward revision to data through April likely accounted for much of the change in the model’s forecast for services as well.Best regards,PatThanks Pat! What Happened on June 26, Reported Today?This is much easier to explain.The GDPNow estimated percentage point contribution for net exports fell from -0.59 percentage points on June 25 to -1.62 percentage points on June 26.The contribution for net exports is still -1.62 percentage points on July 1.That’s a decrease in net exports of 1.03 percentage points. It accounts for most of the plunge in the forecast from 2.5 percent to 1.2 percent.On June 26, we had Advance Economic Indicators.Advance International TradeThe international trade deficit was $105.8 billion in May, up $22.7 billion from $83.0 billion in April.Exports of goods for May were $207.7 billion, $11.8 billion less than April exports.Imports of goods for May were $313.4 billion, $10.9 billion more than April imports.The trade deficit rose by 27.4 percent in May.After bragging about reducing the deficit in April, the administration went silent in May.Also on June 26, Gross Private Domestic Development fell from 1.48 percentage point to 1.35 percentage points accounting for most of the rest of the plunge.Somehow, I missed this advance report or I would have predicted at least some of the decline in the forecast we see today.GDPNow Key Component ChangeBase Forecast: 3.1% on June 25, 1.2% July 1Real Final Sales: 2.7% on June 25, 1.3% July 1Real Final Private Domestic Sales: 3.5% on June 25, 3.1% July 1The difference between the base forecast and real final sales is inventory adjustment which nets to zero over time.Real final sales at 1.3 percent is the bottom line number for the economy.Some prefer to look at real final private domestic sales. That’s a much better 3.1 percent.GDPNow Estimated Contributions to 2026 Q2 GDPThe report is easy to spin however you want. Is your spotlight 1.2%, 1.3%, or 3.1%?Real final sales at 1.3 percent seems like the right focus because it’s the bottom-line estimate. That has been my focus over the years.However, I believe the Fed puts more emphasis on private domestic final sales. 3.1 percent would be a good, unalarming number for the Fed.Nothing Alarming Except InflationAssuming something like the above plays out, the Fed will see more strength than weakness.As of June 30, The Market Forecasts a 70.4 Percent Chance of a Fed Rate Hike Before the ElectionTrump would scream if this happens.A quick check shows the odds are up slightly to a 73.4 percent of at least one hike by the end of October. Click above for comments on rate hikes near an election.The jobs report on Friday may have a huge impact on these estimates.Of course, nothing is on auto-pilot now because inflation is stubborn.Today’s ISM report put a huge spotlight on tariff-related inflation.Original Post