The latest GDP forecasts put in a big question of the strength of the economy.
Friday's jobs report looked pretty good, didn't it?
Interestingly, the GDP forecasts did not think much of it, and neither did I.
The chart is amusing. Nowcast seems impervious to darn near anything while GDPNow likes to swing wildly while steadily trending lower over time.
If you think that makes Nowcast more reliable, then another curious aspect is that the final forecast of GDPNow tends to be better.
GDPNow Latest forecast: 2.5 percent — March 9, 2018
- The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2018 is 2.5 percent on March 9, down from 2.8 percent on March 7.
- The nowcast of first-quarter real consumer spending growth fell from 2.5 percent to 2.2 percent and the nowcast of first-quarter real private fixed investment growth fell from 3.4 percent to 2.4 percent after this morning's employment report from the U.S. Bureau of Labor Statistics.
- The model’s estimate of the dynamic factor for February—normalized to have mean 0 and standard deviation 1 and used to forecast the yet-to-be released monthly GDP source data—declined from 1.62 to 0.96 after the employment report.
Nowcast Latest forecast: 2.8 percent — March 9, 2018
- The New York Fed Staff Nowcast stands at 2.8% for 2018:Q1 and 3.0% for 2018:Q2.
- News from this week’s data releases decreased the nowcast for 2018:Q1 by 0.2 percentage point and decreased the nowcast for 2018:Q2 by 0.1 percentage point.
- A negative surprise from exports data accounted for most of the decrease.
GDPNow Volatility
One reason for GDPNow volatility is that it forecasts more frequently. Nowcast forecasts once a week, on Friday, provided there is not an FOMC blackout.
For some reason, Nowcast is blacked out near FOMC days while GDPNow isn't.
Regardless, that does not come close to explaining the difference between the reports.
Dynamic factors are the major contributor to GDPnow volatility.
I discussed this at least twice before, most recently on March 7 in Another GDPNow ISM Spike Fades where I shared some Emails with Pat Higgins, creator of GDPNow.
Predictably Wrong
My comment today is the same as it was then:
- ISM has not been a reliable indicator of anything for quite some time. All of the diffusion reports from the Fed regions suffer similar flaws.
- It strongly appears that ISM is influencing the GDPNow model factors in a predictable and wrong way.
For a discussion of Friday's jobs report, please see Little Wage Inflation But February Jobs Jump 313,000.
I have to wonder: What the heck was GDPNow forecasting that this report was a disappointment? One might also wonder why there was no reaction at all by Nowcast.