Market News: 1/27/2020Submitted by Executive Wealth Management on January 28th, 2020
On January 30th, the US Bureau of Economic Analysis (BEA) will release the first government reading of 2019 Q4 gross domestic product (GDP) growth for the United States. Official GDP growth numbers are a lagging indicator of economic health. The data is backward-looking rather than forward-looking, so by the time that the report comes out, analysts and Wall Street will be concentrating on GDP growth in 2020 Q1.
There is a small industry that has been built up around forecasting (often called “now-casting”) the growth of the economy. Many prognosticators have developed complicated models to predict GDP growth, including the Atlanta Federal Reserve, which has its own quantitative system called “GDPNow”. On the chart above, you can see how a range of forecasters, including GDPNow, have fluctuated over the last few months in their predictions of the seasonally adjusted annual rate (SAAR) of percentage change in 2019 Q4 GDP. The Atlanta Fed’s model has swung from near economic contraction in the middle of November to positively giddy expansion at the end of December. Trying to trade on this short-term, volatile, forward-looking information could put a trader in positively the wrong position at the wrong time.
We stress that this is the Federal Reserve that has created the GDPNow model. There is no lack of data or resources at the Fed. Looking at their predictions for past quarters, we frequently see similar variation. Their forecasts right before the official release of data are somewhat ok, but even those tend to suffer large error terms when there are anomalous readings. What does all of this mean?
We are often asked why we do not forecast. Forecasts are subject to large error terms and often get it very wrong in extreme circumstances. We would rather observe what the markets are actually doing and react accordingly.