Estimates of US GDP growth for 2014’s fourth quarter have been rising in recent months, but the current outlook still anticipates a substantial slowdown from Q3’s strong advance. The economy is projected to increase 3.6% in Q4 (real seasonally adjusted rate), based on The Capital Spectator’s new median point forecast for several econometric estimates. That’s a solid rate of growth, but the latest outlook still represents a substantially lesser pace vs. the 5.0% increase previously reported for Q3.
The official Q4 GDP report from Washington is scheduled for release this Friday (Jan. 30). In comparison with the consensus view, The Capital Spectator’s median 3.6% estimate for the fourth quarter is modestly higher than the crowd’s outlook. Econoday.com, for instance, advises that fourth-quarter GDP is expected to increase 3.2%, based on a recent survey of economists. Meanwhile, The Wall Street Journal’s latest poll of economists anticipates 3.0% growth in Friday’s “advance” GDP report from the Bureau of Economic Analysis (BEA). The one common feature that unites most estimates in recent history is the upward bias of late in the revisions. For instance, The Capital Spectator’s updated 3.6% forecast for Q4 is notably higher vs. last month’s 3.0% projection.
Here’s a graphical summary of how The Capital Spectator’s Q4 estimate compares with recent history and forecasts from other sources:
As updated estimates are published, based on incoming economic data, the chart below tracks the changes in the evolution of the projections.
Finally, here’s a brief profile for each of The Capital Spectator’s GDP forecast methodologies:
R-4: This estimate is based on a multiple regression in R of historical GDP data vs. quarterly changes for four key economic indicators: real personal consumption expenditures (or real retail sales for the current month until the PCE report is published), real personal income less government transfers, industrial production, and private non-farm payrolls. The model estimates the statistical relationships from the early 1970s to the present. The estimates are revised as new data is published.
R-10: This model also uses a multiple regression framework based on numbers dating to the early 1970s and updates the estimates as new data arrives. The methodology is identical to the 4-factor model above, except that R-10 uses additional factors—10 in all—to forecast GDP. In addition to the data quartet in the 4-factor model, the 10-factor forecast also incorporates the following six series: ISM Manufacturing PMI Composite Index, housing starts, initial jobless claims, the stock market (Wilshire 5000), crude oil prices (spot price for West Texas Intermediate), and the Treasury yield curve spread (10-year Note less 3-month T-bill).
ARIMA GDP: The econometric engine for this forecast is known as an autoregressive integrated moving average. This ARIMA model uses GDP’s history, dating from the early 1970s to the present, for anticipating the target quarter’s change. As the historical GDP data is revised, so too is the forecast, which is calculated in R via the “forecast” package, which optimizes the parameters based on the data set’s historical record.
ARIMA R-4: This model combines ARIMA estimates with regression analysis to project GDP data. The ARIMA R-4 model analyzes four historical data sets: real personal consumption expenditures, real personal income less government transfers, industrial production, and private non-farm payrolls. This model uses the historical relationships between those indicators and GDP for projections by filling in the missing data points in the current quarter with ARIMA estimates. As the indicators are updated, actual data replaces the ARIMA estimates and the forecast is recalculated.
VAR 4: This vector autoregression model uses four data series in search of interdependent relationships for estimating GDP. The historical data sets in the R-4 and ARIMA R-4 models noted above are also used in VAR-4, albeit with a different econometric engine. As new data is published, so too is the VAR-4 forecast. The data sets range from the early 1970s to the present, using the “vars” package in R to crunch the numbers.
ARIMA R-NIPA: The model uses an autoregressive integrated moving average to estimate future values of GDP based on the datasets of four primary categories of the national income and product accounts (NIPA): personal consumption expenditures, gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment. The model uses historical data from the early 1970s to the present for anticipating the target quarter’s change. As the historical numbers are revised, so too is the estimate, which is calculated in R via the “forecast” package, which optimizes the parameters based on the data set’s historical record.