Published August 11, 2023
Following up on last week’s article about why recession calls have been so wrong in 2023, we offer a look at what might be a better source of high-level economic forecasting. Our friends at Delta recently wrote about the success of the Atlanta Federal Reserve Bank’s “GDPNow” model. That analysis is below. Following the Delta review, we provide a link to the Atlanta Fed’s model, which is routinely updated, for those of you who have an interest in learning more about it.
“The lifeblood of the investment business is financial forecasting. Wall Street analysts and investment managers drive their models, allocations, and investment decisions on forecasts. For the big picture, one of our favorite forecasts is the Atlanta Fed’s GDPNow real GDP estimate for the upcoming quarter.
GDPNow is a forecasting model developed by the Federal Reserve Bank of Atlanta in 2014 to provide real-time estimates of the U.S. gross domestic product (GDP) growth. It offers a current snapshot of the economy based on available data up to the present moment. The main objective of GDPNow is to provide policymakers, businesses, and the general public with more up-to-date information compared to the traditional quarterly GDP releases. We include the most recent revision every week at the end under Delta Stock Market Dashboard.
Last week, according to the “advance” estimate released by the Bureau of Economic Analysis, GDP increased at an annual rate of 2.4% in the second quarter in-line with the Atlanta GDPNow estimate and well above the Blue Chip consensus estimate which was last just above 1% and 0% (no growth) at the beginning of the quarter.
GDPNow estimates are shown relative to the Blue Chip consensus – a survey polling America’s top business economists. Knowing where the herd stands can help predict direction and potential surprises. The chart below shows the GDPNow estimate consistently higher through the quarter and the BlueChip consensus lagging and significantly lower.
The predictive accuracy of GDPNow, like any economic forecasting model, can vary over time and depending on the economic conditions. As with all forecasting models, there are inherent challenges and limitations to accurately predicting economic growth. Below is a table of GDP quarterly percentage change with initial consensus and GDPNow estimates and final Bureau of Economic Analysis (BEA) reports. Please note that the 2Q2023 BEA 2.4 is preliminary and there will be two more updates.
Bottom line: we like the length of the forecast and real-time updates. The longer the forecast the greater room for error – GDPNow is only the current quarter. The older the forecast, the usefulness diminishes – GDPNow updates sometimes a couple times a week. . For the third quarter, GDPNow’s initial estimate for Q3 was 3.5% and last week notched up to 3.9%. We expect consensus to move higher.”
The Atlanta Fed’s GDPNow model can be found at: https://www.atlantafed.org/cqer/research/gdpnow
Note that they also offer a mobile app if you really want to keep up to date with the economic data. The St. Louis Fed’s FRED database a go-to source for a wide array of economic charts and data, is also available via mobile app.
Strong earnings from Berkshire Hathaway pushed the company’s stock to a record Monday propelling the S&P 500 higher by +0.9%. Warren Buffet’s Berkshire is considered a proxy for the health of the nation’s industrial economy given the company’s breadth of holdings. A -0.4% dip in stocks Tuesday as a trio of unfriendly reports hit the market. China’s economy showed a slide in exports while goods transport company UPS issued a weak outlook, and Moody’s downgraded ten regional banks. The news hit stocks Wednesday as well with indexes lower by -0.7%. Oil prices pushed upward to their highest level of the year in a strong week for energy shares. A mild consumer inflation report buoyed stocks at the outset Thursday. But interest rates moved sharply higher throughout the day to take the wind out of the stock market. Stocks were up as much as +1.5% before sellers drove the market downward throughout the day to erase the entirety of the gain. U.S. Treasury yields rose again Friday as a report on producer prices suggested more stubborn inflationary pressures. The rising rates added further fuel to an August pullback in high-flying tech/consumer stocks. Through the first two weeks of the month of August, the Nasdaq 100 (QQQ) has managed only one day of notable gains. The Nasdaq was weak again Friday while the other market indexes were little changed.
Weakness in China and rising interest rates pushed market indexes lower this week. The S&P 500 held up relatively well with a slim -0.27% dip. The Nasdaq 100 (QQQ) fell -1.56%, while smallcap stocks slid -1.62%.
Warm wishes and until next week.