GDP Nowcast Update – June 3, 2016

Hidden in the shadows behind Friday’s jobs report was the latest GDP ‘Nowcast’ from the NY FED.   And a new entrant for us in the prediction game:  the Atlanta FED and their ‘GDPNow’ forecast.  We now have great windows into the current thoughts of two federal reserve banks and their influential Presidents, members of the FOMC.  Fabulous!

Follow this link to the original post on GDP Nowcast:

https://www.newyorkfed.org/research/policy/nowcast

And here’s a link to the Atlanta FED ‘GDPNow’ forecast:

https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1

Why you should care:  The Nowcast and GDPNow are both a “sneak preview” into the thoughts of the FED and a highly probably future.    Economists John Faust and Jon Wright sum it us this way, “…by mirroring key elements of the data construction machinery of the Bureau of Economic Analysis, the Fed staff forms a relatively precise estimate of what BEA will announce for the previous quarter’s GDP even before it is announced.”

Excellent.  This is what we’re looking for!

(If you want to dig deeper into this topic, there are two other FED models you might consider reviewing … but I’m not a big fan.  Why?  Neither make a precise numeric prediction…both show possible ranges of stochastic outcomes.  Too imprecise for me.  And the PRISM forecast is not real-time.  But here they are if you’re interested:

https://www.minneapolisfed.org/economy/mf-var-forecast/mfvar-forecast-june-2016

https://www.philadelphiafed.org/research-and-data/real-time-center/PRISM/)

Taking action:    As I’m certain the FED uses the Nowcast and the Atlanta’s GDPNow (‘GDPN‘) in their deliberations, we must watch it carefully.   Use it to make business and investment decisions ahead of GDP releases.   Stay up with it each week or two – and you’ll be far more educated than your competition!

THE BLOG: How accurate is our new tool – the GDPN – at predicting the quarterly GDP figure before it’s announced?  It’s pretty close.   In March, 2015; June, 2015; and March, 2016, the GDPN forecast was within 0.1% of the actual GDP release.   In September and December of 2015, it was off by .4% and .3%, respectively.   Certainly not a perfect record, but it definitely offers us value.  When combined with the Nowcast (and this time I’ll throw in the Minneapolis FED VAR model) we have a pretty good data set.

As we know, the Nowcast is released every Friday.  The GDPN, on the other hand, is updated 6 or 7 times a month following certain data releases.   On Friday, June 3rd, both were released.  And, ironically, the most recent Minneapolis FED VAR update, too, came out on the 3rd.   Excellent.

What do they all tell us?

Nowcast:   Friday’s update suggests 2016: Q2 GDP growth is picking up steam.   Today’s Nowcast is 2.4%.   Here’s the graphic (Click to enlarge):

Look at the weekly trend.  Clearly the analysis is forecasting more strength in our economy – far more than Q1.

GDPN:  The Atlanta FED model forecast is right in line.   Here is what they said:

“The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2016 is 2.5 percent on June 3, unchanged from June 1.”

Additionally, they added a private forecast.  The graphic below shows the GDPN forecast (green line) overlaid on the Blue Chip consensus (blue line):

Finally, let’s take a look at the Minneapolis FED VAR update.   This VAR prediction is slightly lower that the prior VAR forecast.   Just slightly:

The VAR, however, is predicting a 2016: Q2 GDP of between 3.5% and 4%…before falling back to it’s longer term trendline of about 1.8% annual GDP.

Let’s summarize.  We have three forecasts.   The Nowcast – an analysis updated with weekly data – is predicting a GDP reading slightly better than last week, at 2.4%.   The GDPN is unchanged from it’s last reading, at 2.5%.   And the VAR, a model updated about once a month, is predicting a strong Q2 – possibly in the high 3s – before sliding back into a longer term, lower range.

One thing is clear:   It’s very likely 2016: Q2 GDP will be much stronger than Q1.   Of course, that’s not saying much.  Q1 was a paltry 0.8%.

I remain steadfast in my belief that a data-dependent FED can’t possibly see a run-away economy here.  One requiring interest rate increases.  Even if they ignore the evidence from the EU and Japan, with their staggering $10 trillion in negative yielding sovereign debt , they can’t ignore the simple facts right here at home:   This US economy is simply percolating…not overheating.   And there’s no overheating in sight.

The FED, I believe, will once again hold firm.   No rate increase now.

• Terry Liebman