A Modest upturn in the outlook

The outlook has improved since February 2016. According to our NGDP forecasting system, which is statistically driven, so immune to partisan bias or wishful thinking, a full percentage point of nominal GDP has been added to the outlook.  We have gone from the low 3%s to the low 4%s in terms of expected year-ahead growth.

Our normal plot for showing these data reports only the latest year-ahead forecast. However, to get this forecast, we forecast quarterly GDP behind the scenes, and then do the needed calculations to update the plot. This is a convenient way of showing how the outlook changes over time, but it is also helpful to look at the path for a single day forecast. That is, to look at the quarterly forecasts.

The plot below does this for the latest forecast (as of February 2). The blue line shows the year-over-year growth rate in nominal GDP, as currently reported by the Bureau of Economic Analysis, while the orange line shows our forecast for the current quarter, through 2018Q2. The red dot indicates the forecast we are currently reporting on the normal plot for 2018Q1.

When we update our forecast chart, we rerun this forecast for the latest date, and the red dot indicating the 2018Q1 forecast moves up and down creating the financial asset like effect you see in the main chart. What is interesting about the current forecast is the ‘hump’ shape. Our forecast system expects nominal growth to hasten in the next quarters, in terms of year-over-year growth, before coming back below 4%. Looking at the quarter-on-quarter growth rate shows a similar picture.

None of the quarterly differences in our growth rate forecast is particularly big or significant, but it is worthwhile to look under the hood occasionally. The basic message remains the same as it has for the last few months. The economy is not about to take off, but at least the growth slump that emerged in early 2016 is abating, and the economy is not getting worse. Indeed the up ticket in market sentiment since the election is not a mirage; it is a measurable signal with economic effects. Those effects, however, are small and mostly evident for the short-run.


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