GDP Is A Terrific Coincident Indicator
But it is a lousy leading indicator. For example, in 1990:Q1, real GDP increased at an annual rate of 4.70% quarter-to-quarter -- its fastest growth since 5.38% in 1988:Q4. But, as Chart 1 shows, sequential quarterly real GDP did not attain annualized growth of 3-1/2% or higher until 1992:Q1.
Chart 1
Quarter-to-quarter annualized real GDP growth hit 4.77% in 1994:Q4. As shown in Chart 2, real GDP growth did not surpass 3-1/2% until 1996:Q2.
Chart 2
Quarter-to-quarter annualized real GDP growth hit 6.43% in 2000:Q2. As shown in Chart 3, it did not surpass 3-1/2% until 2003:Q2.
Chart 3
All of which brings us to the advance estimate of 4.82% real GDP growth in 2006:Q1. Is this the harbinger of continued solid growth in excess of 3-1/2% or the swan song for such growth? I'm placing my bets on swan song. The reason is that just like 1990:Q1, 1994:Q4 and 2000:Q2, my proprietary real GDP forecasting model, which, by definition incorporates leading indicators of economic activity, is now signaling slower economic growth ahead - in fact, considerably slower growth.
Chart 4 shows the year-over-year growth in actual real GDP along with the year-over-year growth in real GDP as forecasted by my proprietary model. The shaded areas in the chart are the quarters of relative peaks in quarter-to-quarter real GDP growth as discussed above. The (blue) line is the forecasted year-over-year real GDP growth. The model gives a forecast two quarters ahead. So, at each of these relative peaks in actual real GDP growth, the model was forecasting that the growth would be moderating in the two quarters ahead. As of right now, the model is forecasting that by 2006:Q3, year-over-year real GDP growth will be about 3% vs. 3.5% as of 2006:Q1. This implies that annualized real GDP growth quarter-to-quarter will average about 2.7% over the next two quarters vs. its 3.2% average over the past two quarters.
Chart 4
Both in the minutes to the March 28 FOMC meeting and in Chairman Bernanke's April 27 testimony to the Joint Economic Committee, the message was communicated that the Fed expects real GDP growth to moderate from its blistering pace set in 2006:Q1. I doubt seriously if the Fed's forecasting model bears much resemblance to mine. But both are sending the same message - economic growth is set to slow. And the policy implication is that the FOMC is set to pause after one more 25 basis point funds rate hike on May 10.
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Author: Paul Kasriel
Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.
Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.
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