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The usual disclaimer applies: Any opinions or views expressed on this page or in any of the papers are those of the author and are not necessarily the views of any institution.


CURRENT AND RECENT OBSERVATIONS

Real Time Forecasts for Real GDP Growth

Current Projection -- click here.

Previous discussion: The system now searches for best specification and best sample period by indicator. Previously the system had a fixed 80-quarter historical sample. The program now searches across a variety of specifications and across sample periods (from a minimum of 24 observations to a maximum of 80 observations), choosing the best specification by indicator for a given sample using a minimum Schwarz criterion, and searching for the best sample period for minimizing the mean absolute error for a recent prediction period (at this time I am using an 8-quarter period with an ending quarter 2 quarters prior). So, for 2007.Q1 for example, the program searches for the best specification and sample by indicator for minimizing the mean absolute error for that indicator’s prediction of real GDP growth over the 2004.Q4 to 2006.Q3 period. For the historical estimates, the 8-quarter evaluation period moves back accordingly. The 2-quarter lag for the end of the 8-quarter period is to allow for proper comparison for current quarter estimates when the prior quarter estimate is still not "final." Also, the 8-quarter period represents a recent period for the quarter of interest, but one for which, in real time, some quarters would have gone through an annual revision and other more recent ones may not have.

It takes about 25 minutes for the program to run for any given quarter’s estimate. Hence, to produce current vintage estimates for 1998 forward required about 15 hours of computer time. The expanded search process means that the 25 minute run time is the minimum time required to get an updated estimate for the current quarter as new data come in; so perhaps it would be real time plus 25 minutes ... Looking at the historical values, the composite, current vintage RTF-U indicator has the lowest mean absolute error and lowest root mean square error as a predictor of real GDP growth compared to the individual indicators for the full period examined from 1998 forward; RTF-U was third best for RMSE and fifth best for MAE for the 6-quarter period leading into and during the 2001 recession -- from 2000.Q3 to 2001.Q4. Beyond the composite RTF-U indicator, the "best" individual indicators for the full period were: real exports, industrial production, aggregate worker hours, shipments of durables goods, and continuing UI claims. For the period around the recession (2000.Q3 to 2001.Q4), the "best" individual predictors were: industrial production, the work week, shipments of durable goods, continuing UI claims, and ISM non-manufacturing index.

Description: Real time forecasts produce estimates for current quarter real GDP growth based on a centered value from a set of forecasts from incoming indicators. The intent of the system is to use data on key indicators as the data become available and generate a purely data-based estimate of the current-quarter GDP growth estimate. (A paper on it was published in Business Economics; the intro description can be found here.) The real time measures are based solely on available data and do not include forecaster judgment or add factors. RTF-U (see table) -- the measure of underlying GDP growth -- is based on current data for individual indicators and the estimated historical relationship for each individual indicator and GDP growth; weights for combining the individual indicator estimates are determined by the fits of the historical relationships. RTF-Q (see chart) is a measure that attempts to capture the quarterly variation of GDP growth, based on the historical relationship between current vintage actual GDP growth and RTF-U estimates, and the prediction errors of the RTF-U estimate in the prior quarter.

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Paper on "Some Information on the Relative Valuations of Residential and Other Assets Using BEA Fixed Assets Data", January 2008.

Abstract: This paper presents information on the relative valuation of fixed assets, using data from the Bureau of Economic Analysis (BEA) coupled with observed longer-run historical relationshipsand "stylized facts" for macroeconomic relationships in the U.S. economy. Alternative scenarios are examined describing the likely extent of overvaluation of residential assets and the combination of real investment and price changes that would be required to resolve the overvaluation under varying assumptions. The scenarios presented illustrate how changes to the total nominal valuation of the asset stock typically are more easily accomplished through changes to the price of the asset than from changes in real investment flows, and this is particularly true for residential assets with their low depreciation rate. The approach provides a useful framework for the evaluation of alternative future paths and the scenarios presented provide useful benchmarks against which alternative combinations of changes in real investment and prices can be compared.

INTERNATIONAL DEFICITS, DEBT AND INCOME PAYMENTS:

Revised version of "Sharecroppers or Shrewd Capitalists?" paper -- now published in Review of International Economics, November 2007.

Summary, less technical paper on "U.S. International Deficits, Debt, and Income Payments: Key Relationships Affecting the Outlook" (November 2006) -- from presentation to NABE annual meetings in Boston, September 2006. Now published in January 2007 Business Economics.

Paper on "Sharecroppers or Shrewd Capitalists?" (February/March 2006) NOTE: This is an older version ... newer version at top of page ...

For slides from September 2006 presentation at the National Association for Business Economics annual meetings session on Capital Inflows and the Trade Deficit: Measurement and Implications of Global Imbalances click HERE. The slides show updated projections as of the end of August.

Abstract: Large and increasing U.S. international deficits and debt have led to an apparent conventional wisdom that the United States will pay an increasing share of total U.S. output over time to service the growing international debt. This paper presents a detailed framework and analysis of the issues surrounding the question of whether the U.S. is, in fact, on track to be a society of "sharecroppers" or rather is actually more consistent with being a society of "shrewd capitalists." The base scenario projects that the U.S. likely will experience continued growth in its net international debt position, but with a relatively minor cost of servicing that debt in terms of the associated net international income flows. Alternative scenarios based on other analysts’ projections also are presented to illustrate the reliability of the modeling framework and to show how alternative future paths for key variables affect the outcomes. The detailed analysis provides insights into how the underlying relationships affect the final result. In particular, valuation changes -- and notably valuation changes beyond those resulting from exchange rate changes -- have played, and likely will continue to play, a large role in the determination of the U.S. net international investment position. In general, the results indicate that there is a higher likelihood for the U.S. international financial position to be "sustainable" and manageable -- even if we were to observe persisting trade deficits -- than is typically considered to be the case. [Original paper written in February; revised in March. Updated revised version in process.]

OTHER:

Projections of GDP-Dependent Long-Run Equity Returns [Revised May 2006]

Abstract: This paper provides an analysis of long-run equity returns based on simulations that account for stochastic real GDP growth projections, alternative relative equity valuations compared to GDP, and estimated relationships between adjusted dividend returns and relative equity valuations. Data for total corporate equities and nonfarm nonfinancial corporate equities were drawn from the Flow of Funds Accounts and from the National Income and Product Accounts. Data for the S&P500 index also were used. Simulation results point to projected long-run centered broad-based real equity returns over the next 45 years in the range of about 5-1/2 to 6-1/4 percent. Outcomes based on a projected distribution of real GDP growth centered on the Social Security Trustees intermediate real GDP growth assumption -- real GDP growth averaging 2.1 percent over the next 45 years -- point to projected long-run, broad-based real equity returns over the next 45 years centered at about 5-1/2 percent. An assumption of higher real GDP growth such as that made by Robert Gordon or by public and private consensus forecasts yields a centered real equity return in roughly the 6 percent to 61/4 percent range.

Payroll jobs outlook:

Payroll Jobs Outlook Discussion Archive

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RECENT PAPERS:

"Some Information on the Relative Valuations of Residential and Other Assets Using BEA Fixed Assets Data", January 2008.

"Sharecroppers or Shrewd Capitalists?" February 2006.

Projections of GDP-Dependent Long-Run Equity Returns, manuscript, September 2005. See discussion above.

"A Top-Down View of Personal Income Tax Receipts: The Role of the Stock Market and the Business Cycle," manuscript, March 2004 -- revised June 2004. This paper illustrates how the technical relationship between personal income tax receipts and total taxable personal income is related to key economic variables reflecting the performance of the business cycle and the relative valuation of the stock market.

"A Note on the Observed Downward Bias in Real-Time Estimates of Payroll Jobs Growth in Early Expansions," manuscript, August 2003. This is the paper cited in the Wall Street Journal article, "THE OUTLOOK: Job Gauge Skips Key Group: Start-Ups," September 22, 2003.

-------> Click here for an excel file with the data used in the paper.

"When Real Time Data Fail." An examination of 1992 media reports on payroll jobs announcements and how they were later shown to be fundamentally wrong.

"Real Time Forecasting in Practice" as published (with R. Monaco). Original manuscript, August 2003 (Note: This is the paper that won the National Association for Business Economics Mennis Award for contributed papers at the 2003 NABE annual meetings in Atlanta. Published in Business Economics, October, 2003). Cited in article in The New York Times, Sunday Febuary 1, 2004, "Growth Forecasts, Without the Wait" by Daniel Gross.

"A Note on Interest Rates and Structural Federal Budget Deficits," manuscript, October 2002.

"Observed Relationships Between Economic And Technical Receipts Revisions In Federal Budget Projections," National Tax Journal, Vol. LVI, No.2, June 2003, pp. 337-353.

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