«And so the longer it goes on, people seem to believe the greater the chance that something just has to go right. It is a happy a comforting thought, aided in emotional manipulation by the constant mainstream optimism. In that belief, every minor uptick…
Authored by Jeffrey Snider via Alhambra Investment Partners,
Back on March 10, the New York Fed’s attempt at real-time GDP forecasting predicted that the Q1 2017 estimate would be 3.2%. That would have qualified as another decent quarter, the second out of the past three and somewhat in keeping with “reflation.” As we know today, the advance figure calculated by the Commerce Department amounted to just 0.69% growth in Q1.
The point is not to cherry pick the highest quarterly prediction and make fun of FRBNY. At the same time in mid-March the Atlanta Fed’s GDPNow competing model had already collapsed below 1%. Like the New York version, the Atlanta tracker had early on projected better than 3% growth for the quarter. It was at one time in early February just shy of 3.5%, higher than at any point for the other one.
The New York Fed’s parsimonious statement today tersely explained:
Today’s advance estimate of GDP growth for 2017: Q1 from the Commerce Department was 0.7%, substantially weaker than the latest FRBNY Staff Nowcast of 2.7%.
While that was of no value, pointing out merely the obvious, the regular weekly report gives us a clue ironically in trying to explain why we should readily trust its methods.
Extensive back-testing of the model, research, and practical experience have shown that the platform is able to approximate best practices in macroeconomic forecasts. The model produces forecasts that are as accurate as, and strongly correlated with, predictions based on best judgment.
There is a whole lot to that statement covered underneath statistical jargon and buzzwords. That they attempt to “approximate best practices” rather than the results of those practices is especially significant. The New York Fed is trying to model the economy that “should be” rather that the Atlanta Fed’s model of the economy as it actually is. Very important to the former is sentiment, one reason why monetary policy builds itself philosophically around rational expectations and the institutional expectation for successfully manipulating them.
The major disconnect is in the latest quarter entirely one of that area. PMI’s and other measures of business attitudes were through the roof, as were the various indices attempting to gauge consumer confidence. Yet, neither form of sentiment or confidence translated. The difference on the consumer side was especially important given the weight of risks for the future economic trajectory as well as the majority basis for this quarter’s (repeat) disappointment.
None of this is new, of course, as the discrepancy emerged as far back as 2013. But it found another level importantly in 2014, particularly with respect to consumer confidence. Just when the BLS started reporting the “best jobs market in decades”, the various indices recorded a similar surge in positive consumer emotion. The University of Michigan’s Index of Consumer Confidence was in July 2014 barely above 80, but by January 2015 it was nearly 100 and suggesting normalcy at long last. Taken together, the labor statistics as well as confidence was a powerful mix for mainstream interpretation.
