“Nowcasting” the GDP

Do you want an advance reading of the 2016 second quarter GDP reading – even before the quarter is over?   I sure do!    This is almost like completely legal insider trading!

Well, not really.   It’s still a forecast.  But it offers tremendous insight.  Every Friday at 11:15 am (eastern) the New York FED offers us their “Nowcasting Report.”

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

Why you should care:  The NY FED Nowcast is a “sneak preview” into a highly probably future.   This is an excellent forecasting tool.  Methodology is consistent and logical.   And it is highly accurate.

Remember, one of the greatest challenges we face is the fact that GDP is released weeks or months after a quarter ends.   The Nowcast offers us a likely view of the future – before the future is here!

Taking action:    The Federal Reserve Bank and the FOMC use GDP growth as of the three data points to determine if they will raise interest rates.   This is fact.  See my blog from yesterday:

Reading the Tea Leaves

I am certain the FED uses the Nowcast in their analysis.  After all, it’s prepared by one of the Federal Reserve Banks!

So we need to use it too.   Use it to make business and investment decisions ahead of the second quarter GDP release (the ‘advance’ release is July 29th).   Stay up with it each week or two – and you’ll be far more educated than your competition!

THE BLOG:  The NY FED Nowcast might actually predict the future!    In the report, you’ll see they ask the question, “Why should we trust this model?”   Here’s their answer:

“The model produces forecasts that are as accurate as, and strongly correlated with, predictions based on best judgment.  The methodology has been tested for accuracy in many countries, including large developed economies (the Euro area,  Italy, France, Germany, Spain, the United Kingdom, Japan, and Canada), small open economies (Australia, Ireland, Belgium, New Zealand, the Czech Republic, and Scotland), fast-growing economies (Brazil, Russia, India,China, and South Africa), and developing economies (Mexico, Indonesia,and Argentina).”

And here’s the latest graphic (click on the graphic to enlarge):

So, today, the Nowcast is forecasting a 1.71% GDP for Q2, 2016.    As you can see, in the past 4 weeks the model has forecasted growth.    Open the link above for the full report, and you’ll see these Q2 forecast readings:

• April 21:  0.74%
• April 29:  0.81%
• May 06:  0.81%
• May 13:  1.25%
• May 19:  1.71%

The data is dynamic, so you’ll notice minor week-by-week adjustments:

“The difference between two consecutive forecasts (that is, the forecast revision) is the weighted average of the news during the week.  News is defined as the difference between released data and model predictions. The weights account for the information content as well as the timeliness of the data releases.”

When it’s released on July 29th, I believe we will see a Q2 GDP reading below 2%.  The Nowcast is trending in this area.

The Nowcast let’s us keep our finger on the proverbial pulse.  This is a great tool.  I’ll be following it – I suggest you do the same.

• Terry Liebman