GDPNow Drops to 3.8%: My Email Exchange With Pat Higgins on Volatility

Following today's income and outlays report, the GDPNow forecast took a dive to 3.8% from 4.5%. Nowcast barely moved.

The discrepancy between the GDPNow and Nowcast models narrowed substantially today but it is still one full percentage point. It was 1.8 percentage points at its widest.

GDPNow Latest Forecast: 3.8 Percent June 29, 2018

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2018 is 3.8 percent on June 29, down from 4.5 percent on June 27. The nowcast of second-quarter real personal consumption expenditures growth declined from 3.7 percent to 2.7 percent after this morning's personal income and outlays report from the U.S. Bureau of Economic Analysis.

Nowcast Latest Forecast: 2.9 Percent June 29, 2018

  • The New York Fed Staff Nowcast stands at 2.8% for 2018:Q2 and 2.5% for 2018:Q3.
  • News from this week's data releases decreased the nowcast for both quarters by 0.1 percentage point.
  • Negative surprises from the advance durable goods report and personal consumption expenditures data were only partially offset by a positive surprise from new home sales data.

Nowcast Details

Nowcast vs GDPnow Reaction to Income and Outlays Report

  • Nowcast: -0.04
  • GDPNow: -0.70

That is quite a remarkable difference.

Email Exchange With Pat Higgins

On June 25, I emailed Pat Higgins, creator of GDPNow.

Hi Pat

I note a Massive 1.8 Percentage Point Spread Between GDPNow and Nowcast What's going on?

Is it possible to break out the impacts individually when multiple reports come out on one day?

The key day in question is May 31.

Thanks

Mish

I knew that Pat could not comment on GDPNow, but I expected and received an answer to my other question.

Following is the reply from Pat Higgins. First, an explanation from me.

On June 1, GDPNow had a misleading line on its spreadsheet. The ISM was on a line dated May 31. However, I consider the error mine. I should have known the ISM report came out June 1. A check today shows Pat made a fix to the spreadsheet.

For ease in reading, I dispense with normal blockquotes. It's easy enough to spot the end of his comments.

Reply From Pat Higgins

Hi Mish,

I can’t really comment directly on the difference between GDPNow and the FRBNY Nowcast. The only mistake I see in the table is that on May 31, the following reports were released: personal income and outlays and NIPA underlying detail tables. On June 1, the employment situation, ISM Manufacturing, and construction spending reports were all released. Sorry this isn’t completely clear from the table in the GDPNow slide deck you were looking at – it looks like you read ISM Manufacturing and the employment report as being released on May 31. I’ll try and see if there is a way to make the table more clear.

If one came up with an ordering of the data releases, one could come up with a quasi-estimate of the impact of the data releases. For example, on June 1, one could do the following three runs

0.) Data through May 31

1.) Data through May 31 plus data from June 1 employment report.

2.) Data through May 31 plus data from June 1 employment and construction spending reports.

3.) Data through May 31 plus data from June 1 employment, construction spending, and ISM Manufacturing reports.

and take the difference between 1.) and 0.); 2.) and 1.) and 3.) and 2.) to come up contributions of releases. However, if you used the alternative release ordering

0’.) Data through May 31

1’.) Data through May 31 plus data from June 1 ISM Manufacturing report.

2’.) Data through May 31 plus data from June 1 ISM Manufacturing and construction spending reports.

3.’) Data through May 31 plus data from June 1 ISM Manufacturing, construction spending, and employment reports.

it probably won’t be the case that the “employment contribution” in the first list [1.) minus 0.)] is the same as it is on the second list [3’.) minus 2.’)].

Best regards,

Pat

Returning to the Question

My question: Is it possible to break out the impacts individually when multiple reports come out on one day?

Based on the above discussion, it does not seem possible because one might get different results depending on the order the individual reports were applied.

Thanks Pat!

Volatility

So, here we are once again.

GDPNow continues to be far more volatile to the same data releases than Nowcast.

Implications and Observations

Volatility implies that the GDPNow model did not predict the impact of today's Income and Outlays report but the Nowcast model did.

This is an observation, not a slam of either model. I would not know which one to slam, if either. Yet, once again, we have a possibility of a very wide spread converging as the reporting period progresses.

The once 1.8 percentage point spread is now down to 1.0 percentage points.

If we get more bad economic reports that GDPNow does not expect but Nowcast does, the spread will narrow further.

For discussion of today's unexpected Income and Outlays report, please see Real Spending Flat in May, Revisions Lower April Income and Spending.

Meanwhile toss those 4.5% to 5.0% GDP estimates for the second quarter into the ash can.

Mike "Mish" Shedlock

Comments (4)
No. 1-4
Casual_Observer
Casual_Observer

The Kudlow optimism is what will cause exuberance followed by correction and then crash due to North Korea and trade. I'm not sure what order things will happen but a crash is virtually guaranteed once the Fed hikes rates.

Realist
Realist

As always Mish, I really appreciate the effort you put into understanding these two models and how they work. I certainly would not want to put forth that effort. Having said that, I am more concerned with looking out 1-2 years. I like to use your site to give me this short term information, and then combine it with my own macro info to reach my conclusions. Hi Casual. Kudlow is one of the cooler heads that I hope will restrain Trump in his quest to start an all-out trade war. Though, even he seems to have to follow the “party line” at times. His treatment of Canada recently (one of the countries with the most open markets in the world) was shockingly ignorant. Again, though the second quarter GDP might be slightly above average, I continue to expect 2% GDP growth for the US over the next 1-2 years.

lol
lol

what bout $3 or even $4 (5) gal gas,refining costs soaring,prices on everything soaring.Somebody printing trillions in fresh bills (not the fed lol).Prepare for gas shock as prices double (triple)to all time record by labor day!

Realist
Realist

Hi lol. I agree that higher energy costs (Thanks to Trump trying to keep Iranian oil out of the market) will help slow the economy, in spite of the tax cuts (which are helping right now). Combine that with the tariffs on imported steel, aluminum, lumber, etc and US manufacturing is really going to slow down. Expect more manufacturers (like Harley) to announce that they will shift production elsewhere, and/or begin layoffs and temporary shutdowns. Even if 2nd quarter GDP hits 3%, I expect no more than 2%/year overall through Trumps presidency. An actual recession is a possibility, if he keeps pushing this “Trade War is easy to win” stupidity.