NGDP Forecast Update: What has driven it higher?

The NGDP forecast climbed higher, to a little over 4%.

To get a sense of why the forecast has moved higher through August, we can start by looking at the sub-models.

When we look at the sub-model forecasts, patterns emerge. Firstly, all the models are up a little, indicating the main direction of markets has moved in a way consistent with higher NGDP.

Further, Models 2 and 4 have increased a good amount. It turns out these two share a data matrix. This dataset is unique in that it contains two principal component scores, whereas the other models make use of one score.

This means that the ‘second component’ of market data is doing extra lifting in this interval. Interpreting this component is somewhat speculative, but we can say it draws more from our US dollar Index and currency data feed.

For the overall rise in August, copper and yield curve measures have done most of the heavy work, while oil prices and inflation expectations have weighed on the outlook. Recent NGDP revisions have also lifted the forecast somewhat, as the yearly rate of NGDP growth was revised from 3.6% to 4%.

It seems almost too good to be true, but we are looking at 4% NGDP growth over the next year.


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