As of last Friday, the Atlanta Fed GDFPNow model for the second-quarter GDP stood at 3.4%. In contrast, the FRBNY Nowcast report was 2.2%.
This is yet another large gap, albeit smaller than the ones we saw for the first quarter. What’s more interesting is some of the recent gyrations.
What’s more interesting is that in some of the recent gyrations, on the same data, the models went opposite directions.
GDPNow Estimate June 2
Nowcast Estimate June 2
The spread has narrowed quite a bit. But what caught my eyes is the way it happened.
GDPNow Detail
Nowcast Detail
Nowcast vs GDPNow Synopsis
The combination of construction spending and ISM added 0.2 percentage points to the GDPNow forecast despite the fact that construction spending was a subtraction.
I captured the report on June 2, labeling it GDPNow Silliness.
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2017 is 4.0 percent on June 1, up from 3.8 percent on May 30. The forecasts for second-quarter real nonresidential structures investment growth and real government spending growth fell from 6.2 percent and -0.3 percent to 3.4 percent and -0.7 percent, respectively, after this morning’s construction spending release from the U.S. Census Bureau. The forecasts for second-quarter real consumer spending growth and real nonresidential equipment investment growth increased from 3.3 percent and 5.1 percent to 3.6 percent and 6.6 percent, respectively, after this morning’s Manufacturing ISM Report On Business from the Institute for Supply Management.
I do not have the precise breakdown other than construction subtracted but ISM more than made up for it to the tune of +0.2 percentage points to GDPNow.
On the same ISM Data, Nowcast concluded GDP would drop by 0.1 percentage points.
The models do not agree on the direction, on the same data. Employment data was similar.
Employment Data
Following foreign trade and employment data (jobs + unemployment), GDPNow took off a whopping 0.6 percentage points.
Nowcast did nothing on the employment data (jobs) and subtracted less than 0.1 percentage points for foreign trade data.
Nowcast did add a tiny bit for the civilian employment rate. The net effect is GDPNOw subtracted substantially for employment but Nowcast nudged slightly higher.
I have commented on this before but it is worth repeating. It matters why the unemployment rate drops. In this case, the unemployment rate fell with employment declining by 233,000 and with those not in the labor force rising by 608,000.
For more details, please see Payrolls “Unexpectedly” Weak, Negative Revisions, Earning Poor: What Happened?
It is absurd to believe such reports, if accurate, will add to GDP.
Models Don’t Think
A key problem in all of this is simple. Models do not think. Historically, falling unemployment is a good thing so that is what the model sees. Instead of looking at unemployment, I suggest the models look at employment.
Historically, rising ISM data is a good thing, so that is what the model sees. It matters not one iota to the model that the Fed regional reports and the ISM diffusion indexes have been wrong for a long time.
And as I have pointed out, ISM and Markit’s PMI do not agree despite the fact they supposedly measure the same thing. For discussion, please see Markit PMI and ISM Diffusion Indexes Upbeat on Jobs.
Cumulative Bias
It’s plug and play, baby, with each model having its own biases and inaccuracies, often in opposite directions.
When the bias is additive, as it was last month, we see amazingly wide gaps in GDP forecasts.
My point is not to overly criticize the models. I have learned a lot from them. I hope my analysis goes into further refining the models to make them better.
I repeat once again, that Pat Higgins, creator of GDPnow, is very generous with his time in answering questions about his model. Both models represent a starting point for further analysis.
Meanwhile, please think, because the models don’t, by design.
Mike “Mish” Shedlock
A lot of moving parts. GDP calc’d quarter over quarter … and we’re seeing many revisions to Q1 numbers so Q2 GDP floats up / down on revisions.
So many reports and models. Many are at odds with each other. Still, they are better than no models at all.
Economic growth will remain slow for so many reasons (demographics, debt, low productivity growth). Labour shortages are also holding back growth. The JOLTS report shows 6.1 million unfilled jobs (the most ever). The US can’t find enough skilled workers to fill all those job openings. The companies will have to either import the workers or export the jobs.
Not sure models are much use at all as it encourages tinkering.
Below – wikipaedia – Copperthwaite in Hong Kong. A lesson to those with models.
“He refused to collect economic statistics to avoid officials meddling in the economy. According to Catherine R. Schenk, Cowperthwaite’s policies helped it to develop from one of the poorest places on earth to one of the wealthiest and most prosperous: “Low taxes, lax employment laws, absence of government debt, and free trade are all pillars of the Hong Kong experience of economic development.” The Economic Freedom of the World 2015 Report ranks Hong Kong as both the freest economy in the world, a distinction it has held since this index began ranking countries in 1975, and among the most prosperous.”
Point taken. Though we all want models and forecasts in order to plan for the future. I am relying on weather forecasts today to be able to pack properly for a trip to China.
By the way, I am a fan of Hong Kong. My brother-in-law lived there for 25 years and I always enjoyed visiting.
I’ve come round to diverse portfolio and tilting sections percentages.
Weather is easier to forecast than markets with CBs introducing unintended consequences, geopolitical crap and politicians tweeting left and right.
The illusion of control is dangerous. Admission of ignorance and knowing control is an illusion helps me float a little better.
People want to prosper in peace with gentle rule of common law. I believe 99.9% of people don’t want to see their neighbour become a beggar so reasonable taxation is acceptable. That’s it.
Employers all want the white or Asian twenty or early thirty something with a BA degree in either a STEM field or something like Accounting or Finance with 2-5 years experience is the sweet spot
You conveniently left out any news regarding the JOLTS report. Job openings are at a record high. Hires fell because there literally is a dearth of qualified applicants in many industries. Ibe reason what many infrastructure projects aren’t being completed is because there literally aren’t any applicants or people looking for work. Ex. the streets in the suburbs of Boston and NYC haven’t been this bad in years. Many streets are pocked with potholes and are past useful life. Even the Boston Globe had an article about employers desperately needing to find people and in certain professions such as health care RNs are making in the six figures with five figure sign on bonuses. Retailers are starting holiday hiring for 2017 now and offering $20 and hour with $5000 sign on bonuses. .
I know I’m the entire NYC, Connecticut, Eastern Massachusetts region the economy is booming and setting up a wage – price spiral that is showing up in prices at restaurants, clothing stores, anything related to recreation and $2000 now for a small one bedroom apartment in most of Connecticut and 25 + plus miles outside Boston is the new normal
Hi nik. Of course some areas in the US are experiencing larger labour shortages than others, but certainly, labour shortages are becoming more commonplace. This begs the question: how to solve the problem.
Higher wages, though they might help the company offering them, don’t help alleviate the problem much as it simply moves the available labour from one job to another. That leaves us with four options:
1. Train those who need the skills to get the available jobs (something that I am personally involved in). This is expensive, slow, and not always effective as some workers simply can’t learn the necessary skills. Still, it is part of the solution. It also raises the question of who should pay for the training. If you expect businesses to pay for training, then it may not happen as they would rather choose the easy route and simply steal workers from other businesses by offering higher wages ( as you indicated in your post).
2. Increase automation to replace labour. This is Japan’s approach. Again, this is expensive, slow, and only works in some areas. It is also a small part of the solution
3. Import more skilled labour to satisfy the current need.
4. Export the jobs to other countries who have the available skilled labour.
Which of these options do you favour? Which are you against? Which options are being pursued by your various levels of government, and by businesses?
Eliminate welfare and you will find plenty of workers.
That sounds easy, and I wish it was that easy, but it isn’t. You are assuming that people on welfare have the skills to fill these vacant jobs, but in the vast majority of cases, they don’t. I know this because I am involved with a charity that is attempting to train these people (among others).
As I said earlier, training is the first option, and it solves a tiny part of the problem but you really need to consider the other three options:
2. More automation
3. Import more skilled labour
4. Export more of these jobs
Otherwise the skilled labour shortage will continue to grow, and restrict economic growth in the US.
A large number of job vacancies are for $10 an hour jobs. Many welfare cases could take them, but when you add in Medicaid, Section 8 housing, SNAP, the jobs would have to pay $35 an hour just to break even (this for single parent of three children). Plus, many are getting SSI DI (disability income) for one or more of their children. This can raise breakeven to $42 an hour.
You are correct that many job openings only pay $10/hr but increasingly, the problem is high paid, high skilled jobs that are going begging. Low paid jobs are being automated at higher rates because they tend to be more repetitive. Since I don’t live in the US, I will have to take your word for it that social programs can equate to $42/hr although that sounds very high to me. In my country, people on social assistance live on the equivalent of a job that pays roughly $8/hr.