GDP Outlook Update…Real GDP!

We stress nominal GDP in our posts, for reasons that are at this point well established. This shouldn’t be taken to mean we don’t care about real output, other’s simply cover it so much that we tend to leave the subject alone, unless there’s good reason not to.

Real GDP is a tricky concept. In a modern economy of such vast complexity a concept like real GDP certainly has a meaning, but we shouldn’t think it comes close to fully describing the ‘magnitude’ of the economy, which is what it’s about: size. It might be better if RGDP were thought of as a production index, rather than a quantity expressed as dollars from a particular base-year, as this would help drive this point home – a direction in a multidimensional space, rather than something that is directly estimated, as is the case with NGDP.

In order to give you more value, we are currently developing a family of models to forecast other interesting economic variables. Our approach is still a Market Monetarist one, wherein we rely on model averaging and market data. The plot below gives you a sneak peek at one of the new forecasting systems: Real GDP. The forecast line is rather ‘bumpy’ because now it is produced from only a single model. When we are done, we will rank-order the best models and average their results.

Still it is a solid model and we have no reservations publishing this result. Using our latest NGDP forecast, as well as market data from the Treasury’s inflation indexed bonds, it looks like Real GDP is set to come in at about 2.1% over the next year.

On the way to 2.1%, the model tells us real GDP is expected to hit 2.6% on a year-over-year basis in the first quarter of 2018. This is due to the head-of-steam the economy has built up in the last two quarters, where quarterly nominal growth has been at least better than in 2015 and 2016.

The President has been touting “3%” as the real GDP number he wants to see. This is certainly possible for the still-depressed US economy to post, at least for a few years, but as the data stand, it’s a stretch. First you need to lift NGDP growth to 5%, which would require a big change at the Fed.


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