Optimistic Again, Will A Fed Algorithm Be Right Again?
Published Friday, February 10, 2023 at: 8:44 PM EST
A Federal Reserve Bank of Atlanta algorithm indicates the economy is growing +2.2% this quarter, while a survey of leading economists predicts the economy will shrink about three-tenths of 1%.
Consensus forecasts by economists are far from perfect. However, for years human forecasters have been more reliable than the GDPNow algorithm. In fact, over the years, GDPNow’s computer-driven forecast has been wildly wrong at times.
It is notable that, for the last three consecutive quarters, a period marked by high volatility, the GDPNow algorithm has been much more accurate in predicting growth than the forecasts by humans.
The Fed’s GDPNow forecast is updated two or three hours after the government releases economic data throughout every quarter. As the end of a quarter nears, GDPNow’s forecast should come closer to the actual growth rate announced by the government four weeks after the end of every quarter, and then it is revised again eight weeks after the end of the quarter. The actual final GDP growth rate is revised a third time 12 weeks after the end of every quarter.
The Federal Reserve Bank makes it clear that GDPNow is “not an official forecast of the Atlanta Fed.” It’s a running estimate of real GDP growth. No subjective adjustments are made to GDPNow. GDPNow forecasts are based solely on the mathematical results of the algorithm.
The last time we pointed out that the human forecasters were much more negative than the GDPNow algorithm about prospects for growth was three months ago. Back then, the GDPNow algorithm was predicting a spectacular +4.3% growth rate for the fourth quarter of 2022, while the leading economists in the Blue Chip consensus of economists expected a fractional growth rate of three-tenths of 1%.
The actual growth rate came in on January 26 at +2.9%, much closer to the GDPNow forecast.
Although the algorithm’s track record is mixed, it was more reliable than the human experts in the second quarter of 2022 and the third quarter as well as in the fourth quarter of 2022. These nine months were beset by anomalies, including supply chain disruption, declining demand for inventory, the highest inflation rate in over 40 years, and an aggressive succession of eight Federal Reserve rate hikes along with a war in Ukraine, which has made energy prices volatile.
We’re not saying that the GDPNow forecast is a breakthrough in predicting the economy, but the algorithm has been more accurate at predicting that rate of growth in quarterly gross domestic product during this unusual period of high volatility.
The S&P 500 stock index closed Friday at 4,090.46 up by a meager +0.22% from Thursday, and down -1.11% from a week ago. The index is up +82.82% from the March 23, 2020, Covid bear-market low, and -14.72% lower than its January 3, 2022, all-time high.
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