The Moment When Deutsche Bank's Joe LaVorgna Threw in the Towel on Being a U.S. Economic Bull
July 30, 2015 was the day it all changed for Deutsche Bank AG Chief U.S. Economist Joseph LaVorgna.
On that day, the initial reading of second-quarter U.S. GDP growth showed the economy expanded at 2.3 percent, which was 2 ticks below the consensus estimate and LaVorgna's call. But that underwhelming print wasn't what turned one of Wall Street's biggest bulls on the U.S. economy into an analyst with a much more pessimistic outlook for growth. Rather, the revisions to past growth figures that accompanied this release are what LaVorgna says proved to be a "eureka moment" for how he viewed the U.S. economy.
The Bureau of Economic Analysis indicated that from 2011 to 2014, real GDP rose at an average annual rate of 2 percent, three-tenths of a percentage point slower than the previously reported figures.
"What happened was that we got the GDP revisions and it turned out that the economy was even weaker than I thought so you go back and look at the data and you say 'wow, the best year for GDP growth in this cycle was 2010 at 2.5 percent real growth,'" he said. "We haven’t had 3 percent growth since 2005, so any chance of us, in my mind, of getting growth to 3 percent or better wasn't going to happen."
LaVorgna's evolution mirrors, to a certain extent, another that's taking place amid economists at the Federal Reserve. Fed officials who often spoke of the "normalization" of monetary policy as the scars of the Great Recession healed and activity picked up steam now reference a "new normal" for the economy, one in which an aging population translates into slower growth and entails that they won't have to slam down on the brakes very hard to rein in the U.S. expansion if and when it starts to overheat.
While the debate over whether the U.S. economy is faced lackluster growth that warrants years of low interest rates trundles along, LaVorgna has enjoyed some early success in his glass-half-empty transformation. That's because, in retrospect, late July of last year proved a good time to temper expectations for growth.
The period of relative market tranquility was soon shattered in the aftermath of the August devaluation of the Chinese yuan, which sent global stocks tumbling.
While growth in the third quarter ultimately came in at 2 percent, the following two quarters saw growth slip below 1 percent at a seasonally adjusted and annualized rate. This "eureka moment" had a visible impact on where the economist stands relative to his peers.
From 2013 through the second quarter of 2015, LaVorgna's quarterly GDP estimates exceeded the consensus estimate for the vast majority of observations. But since the annual revisions were published in 2015, he's had a below-consensus call for every initial quarterly GDP print.
Consensus figures have been off by a cumulative 1.7 percentage points over this span, while LaVorgna has missed by just half a percentage point.
"It was those things that happened last summer that really got me thinking about the likelihood we get to 3 percent [GDP] growth and what the market response would be if the Fed[eral Reserve] tried to hike, and at that point I really started to cut all my forecasts," he said.
LaVorgna is forecasting below-consensus growth for 2016, 2017, and 2018.
While the economist deems U.S. recession risks to be not insignificant at this juncture, he also sees a number of fading headwinds related to oil, the dollar, and the upcoming presidential election that have the potential to buoy growth — just not by too much.
"We'll grow, I just don't think we'll grow much above 2 percent unless something changes in the global economy or the U.S. fiscal side," he concluded.