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July 10, 2014
Introducing the Atlanta Fed's GDPNow Forecasting Model
The June 18 statement from the Federal Open Market Committee opened with this (emphasis mine):
Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months.... Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing.
I highlighted the business fixed investment (BFI) part of that passage because it contracted at an annual rate of 1.2 percent in the first quarter of 2014. Any substantial turnaround in growth in gross domestic product (GDP) from its dismal first-quarter pace would seem to require that BFI did in fact resume its advance through the second quarter.
We won't get an official read on BFI—or on real GDP growth and all of its other components—until July 30, when the U.S. Bureau of Economic Analysis (BEA) releases its advance (or first) GDP estimates for the second quarter of 2014. But that doesn't mean we are completely in the dark on what is happening in real time. We have enough data in hand to make an informed statistical guess on what that July 30 number might tell us.
The BEA's data-construction machinery for estimating GDP is laid out in considerable detail in its NIPA Handbook. Roughly 70 percent of the advance GDP release is based on source data from government agencies and other data providers that are available prior to the BEA official release. This information provides the basis for what have become known as "nowcasts" of GDP and its major subcomponents—essentially, real-time forecasts of the official numbers the BEA is likely to deliver.
Many nowcast variants are available to the public: the Wall Street Journal Economic Forecasting Survey, the Philadelphia Fed Survey of Professional Forecasters, and the CNBC Rapid Update, for example. In addition, a variety of proprietary nowcasts are available to subscribers, including Aspen Publishers' Blue Chip Publications, Macroeconomic Advisers GDP Tracking, and Moody's Analytics high-frequency model.
With this macroblog post, we introduce the Federal Reserve Bank of Atlanta's own nowcasting model, which we call GDPNow.
GDPNow will provide nowcasts of GDP and its subcomponents on a regularly updated basis. These nowcasts will be available on the pages of the Atlanta Fed's Center for Quantitative Economic Research (CQER).
A few important notes about GDPNow:
- The GDPNow model forecasts are nonjudgmental, meaning that the forecasts are taken directly from the underlying statistical model. (These are not official forecasts of either the Atlanta Fed or its president, Dennis Lockhart.)
- Because nowcasts are often based on both modeling and judgment, there is no reason to expect that GDPNow will agree with alternative forecasts. And we do not intend to present GDPNow as superior to those alternatives. Different approaches have their pluses and minuses. An advantage of our approach is that, because it is nonjudgmental, our methodology is easily replicable. But it is always wise to avoid reliance on a single model or source of information.
- GDPNow forecasts are subject to error, sometimes substantial. Internally, we've regularly produced nowcasts from the GDPNow model since introducing an earlier version of it in an October 2011 macroblog post. A real-time track record for the model nowcasts just before the BEA's advance GDP release is available on the CQER GDPNow webpage, and will be updated on a regular basis to help users make informed decisions about the use of this tool.
So, with that in hand, does it appear that BFI in fact "resumed its advance" last quarter? The table below shows the current GDPNow forecasts:
We will update the nowcast five to six times each month following the releases of certain key economic indicators listed in the frequently asked questions. Look for the next GDPNow update on July 15, with the release of the retail trade and business inventory reports.
If you want to dig deeper, the GDPNow page includes downloadable charts and tables as well as numerical details including the model's nowcasts for GDP, its subcomponents, and how the subcomponent nowcasts are built up from both the underlying source data and the model parameters. This working paper supplies the model's technical documentation. We hope economy watchers find GDPNow to be a useful addition to their information sets.
By Pat Higgins, a senior economist in the Atlanta Fed's research department
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