With 10 days left in the Third Quarter, it seems that lots of folks have been obsessing about the various GDP Now forecasts. The thinking is the data will impact how the FOMC will determine whether we get more rate increases or if it’s higher for longer, or even potentially reflecting a 2024 recession and Fed rate cuts.
Now Casting was first developed by the Federal Reserve Bank of Atlanta to provide a real-time estimate of GDP growth for the current quarter. It uses (13 or so) inputs1 to extrapolate a rough approximation of economic growth. The NY Fed subsequently added its version, as did other regional Fed banks.
While these various Now Casting sites are useful as thought exercises, we run the risk of taking them too literally. The results from these range from being fairly accurate, occasionally being off a little to being wildly wrong.
This is the nature of the beast.
As we progress deeper into the three-month quarter, more and more data becomes available. As GDP Now updates its model with the latest data, it becomes more accurate. By the time the quarter ends, GDP Now is pretty good — the average error is about 0.5% points, plus or minus.
Still, the different methodologies used by each Fed bank lead to surprisingly different outcomes.
As the charts up top show, the NY Fed is around 2.25%, versus the Atlanta Fed’s 5%. If you are a betting person, you would assume Q3 GDP is somewhere in between.
I find these to be useful models but must constantly remind myself that they are merely rough approximations of the BEA GDP, which itself is a rough approximation of the US economy. The error range can be large, especially early in the quarter, or when an economic shock occurs, such as early in the 2020 Pandemic.
Take all of these with a grain of salt…
Previously:
GDP Update: -52.8% (June 2, 2020)
Cherry Picking Your Favorite GDP Forecast (May 18, 2016)
Atlanta Fed GDPNow for 2016 Q2 (LOL) (May 18, 2016)
Sources:
NY Fed NowCast
Introducing the New York Fed Staff Nowcast
NY Fed, April 12, 2016
GDPNow: A Model for GDP ‘Nowcasting’
FRB Atlanta Working Paper 2014-7
By Patrick C. Higgins
Federal Reserve Bank of Atlanta, July 1, 2014
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1. Data inputs include retail sales, industrial production, real personal income, real personal consumption expenditures, net exports, and more.
