Thursday, February 4, 2016

"January Data Point to a Modest Decline in U.S. Real GDP in the First Quarter of 2016"

From Advisor Perspectives:
Each month, the U.S. Institute for Supply Management (ISM) conducts a survey on the state of the manufacturing and non-manufacturing industries of the U.S. economy and releases data for the previous month. The data are closely followed by the financial media, economists, and wealth portfolio managers as they provide the earliest reading on the state of the economy.

The ISM indicators cover different fields of the manufacturing and non-manufacturing industries, such as production level, employment level, new orders, inventories, exports, imports and prices.1 The Forecasting Advisor choose a number of indicators from the ISM survey to construct a monthly coincident economic index (i.e. a measure of the current overall economic situation) from July 1997. Figure 1 illustrates the evolution of real GDP growth and the coincident economic index from the third quarter of 1997 to the third quarter of 2015. It shows that the coincident economic index is highly correlated with the evolution of U.S. real GDP growth during that period. More specifically, the coincident economic index tracks very well the periods of weakening, including before the start of the recession of 2008-2009 and the periods of strengthening in real GDP growth between 1997 and 2015. Since the ISM data are never revised during the year2 and timely, the coincident economic index is undoubtedly a valuable indicator to assess the state of the U.S. economy.
The Current State of the U.S. EconomyThe Forecasting Advisor Model is used here to provide a forecast of the rate of change in U.S. real GDP for the first quarter of 2016. The official first estimate for first fourth quarter will be released by the U.S. Bureau of Economic Analysis (BEA) on April 28. 
The forecast for the first quarter of 2016 from The Forecasting Advisor Model is reported in Table 1 below. We also included the most recent consensus from the Wall Street Economic Forecasting Survey. The Forecasting Advisor Model projects a modest decline in real GDP of 0.6% (annual rate) for the first quarter, based on data up to January. Real GDP grew by 0.7% (first official estimate) in the last quarter of 2015. The forecast will be updated on March 3rd to include data for February.