NGDP Outlook Update January 2018

Our new NGDP forecast, for 2019Q1, is coming in a bit north of 4.1%. This is the first time we’ve started a new forecast above 4.0%, the previous vintage starting a 3.9%. We begin a new forecast every quarter.

By convention, we always look one year ahead of the current quarter. The current upward drift in the forecast is driven by WTI oil, stocks and to a lesser extent the yield curve steepness. TIPS spreads have been an erratic force on the forecast.

As strong as the forecast is, relative to the outlook in recent years, it’s probably too bearish. The New York Fed has real GDP for Q4 of 2017 tracking at nearly 4% annualized in its Nowcast, while Atlanta Fed has it at a tamer 3.3%. Either way, NGDP growth in Q4 is almost certainly going to come in stronger than our model assumes (yearly pace of 4.5%), which in turns “sets the tone” for subsequent quarterly forecasts, as the system is recursive.

What’s likely to happen, is that on January 26, nominal GDP will come in at a yearly pace greater than 5%. This is going to meaningfully lift the outlook, or at least our attempt at recovering the outlook from the financial markets.

The GDP report could certainly affect asset prices, too. It’s easy to become enthusiastic at the prospect of two consecutive quarters of NGDP growth over a 5% yearly pace, that extra point and a half of growth makes a world of difference. However, we should hold tight for the moment and await the first estimate, as we may be set for a volatile forecast this quarter, as Q4 GDP is introduced and revised.


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