• 2 hours Disney Beats Out Comcast In $71.3B Mega-Merger
  • 5 hours The Feds Continue To Prop Up Equities Markets
  • 7 hours Bejing's Sway In South China Sea Is Fading
  • 23 hours Saudis Eye Billions As Stocks Get Emerging Market Boost
  • 1 day Airbnb In Acquisition Mode Ahead Of IPO
  • 1 day Gold Hangs At $1,300 Ahead Of Fed Meeting
  • 1 day Champagne Sales Slow As European Economic Worries Grow Louder
  • 2 days Putin Signs “Digital Iron Curtain” Into Law
  • 2 days Russian Metals Magnate Sues U.S. Over Sanctions
  • 2 days Tesla Looks To Jump Into Indian Market
  • 2 days Global Banks Lay Groundwork To Re-Inflate Asset Prices
  • 3 days Homeowners Experiment With Risky New Investment Trend
  • 3 days U.S. Tech Stocks Look Increasingly Vulnerable
  • 3 days De Beers To Expand World’s Most Profitable Diamond Mine
  • 3 days Ford CEO Gets Raise After Massive Layoff Round
  • 4 days Germany’s Flirtation With Recession Could Cripple The Global Economy
  • 4 days Where To Look As Gold Miners Inch Higher
  • 5 days Google Faces Billions In Fines From European Regulators
  • 5 days The Energy Industry Has A Millennial Problem
  • 6 days Russian Banks Scramble For Sanction Loopholes
The Chatroom Cartel Running Global Bond Markets

The Chatroom Cartel Running Global Bond Markets

Eight major banks have been…

Lending: The Good, Bad, And Ugly

Lending: The Good, Bad, And Ugly

Aristotle said, “The most hated…

  1. Home
  2. Markets
  3. Other

Investigating Curious Anomalies in GDPNow and Nowcast GDP Estimates

As of last Friday, the Atlanta Fed GDFPNow model for the second-quarter GDP stood at 3.4%. In contrast, the FRBNY Nowcast report was 2.2%.

This is yet another large gap, albeit smaller than the ones we saw for the first quarter. What’s more interesting is some of the recent gyrations.

What’s more interesting is that in some of the recent gyrations, on the same data, the models went opposite directions.

GDPNow Estimate June 2

Nowcast Estimate June 2

The spread has narrowed quite a bit. But what caught my eyes is the way it happened.

GDPNow Detail

Nowcast Detail

Nowcast vs GDPNow Synopsis

The combination of construction spending and ISM added 0.2 percentage points to the GDPNow forecast despite the fact that construction spending was a subtraction.

I captured the report on June 2, labeling it GDPNow Silliness.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2017 is 4.0 percent on June 1, up from 3.8 percent on May 30. The forecasts for second-quarter real nonresidential structures investment growth and real government spending growth fell from 6.2 percent and -0.3 percent to 3.4 percent and -0.7 percent, respectively, after this morning’s construction spending release from the U.S. Census Bureau. The forecasts for second-quarter real consumer spending growth and real nonresidential equipment investment growth increased from 3.3 percent and 5.1 percent to 3.6 percent and 6.6 percent, respectively, after this morning’s Manufacturing ISM Report On Business from the Institute for Supply Management.

I do not have the precise breakdown other than construction subtracted but ISM more than made up for it to the tune of +0.2 percentage points to GDPNow.

On the same ISM Data, Nowcast concluded GDP would drop by 0.1 percentage points.

The models do not agree on the direction, on the same data. Employment data was similar.

Employment Data

Following foreign trade and employment data (jobs + unemployment), GDPNow took off a whopping 0.6 percentage points.

Nowcast did nothing on the employment data (jobs) and subtracted less than 0.1 percentage points for foreign trade data.

Nowcast did add a tiny bit for the civilian employment rate. The net effect is GDPNOw subtracted substantially for employment but Nowcast nudged slightly higher.

I have commented on this before but it is worth repeating. It matters why the unemployment rate drops. In this case, the unemployment rate fell with employment declining by 233,000 and with those not in the labor force rising by 608,000.

For more details, please see Payrolls “Unexpectedly” Weak, Negative Revisions, Earning Poor: What Happened?

It is absurd to believe such reports, if accurate, will add to GDP.

Models Don’t Think

A key problem in all of this is simple. Models do not think. Historically, falling unemployment is a good thing so that is what the model sees. Instead of looking at unemployment, I suggest the models look at employment.

Historically, rising ISM data is a good thing, so that is what the model sees. It matters not one iota to the model that the Fed regional reports and the ISM diffusion indexes have been wrong for a long time.

And as I have pointed out, ISM and Markit’s PMI do not agree despite the fact they supposedly measure the same thing. For discussion, please see Markit PMI and ISM Diffusion Indexes Upbeat on Jobs.

Cumulative Bias

It’s plug and play, baby, with each model having its own biases and inaccuracies, often in opposite directions.

When the bias is additive, as it was last month, we see amazingly wide gaps in GDP forecasts.

My point is not to overly criticize the models. I have learned a lot from them. I hope my analysis goes into further refining the models to make them better.

I repeat once again, that Pat Higgins, creator of GDPnow, is very generous with his time in answering questions about his model. Both models represent a starting point for further analysis.

Meanwhile, please think, because the models don’t, by design.

Mike “Mish” Shedlock

Back to homepage

Leave a comment

Leave a comment