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A statue of a bull.
Reuters/Carlo Allegri
US GDP forecasting models are loving what they are seeing.
INSANECASTING

Economic algorithms are ridiculously bullish about the US right now

By Dan Kopf

Donald Trump is optimistic about US GDP growth. “I see no reason why we don’t go to 4, 5, even 6 percent,” Trump told his cabinet in December 2017, according to Bloomberg. Many observers found the idea ludicrous, given that few economists thought growth of the world’s largest economy could get above 3%, and many thought it would be much lower.

Yet according to the Federal Reserve Bank of Atlanta, we may already be living in Trump’s fantasy world. As of Feb. 1, the Atlanta Fed’s GDPNow model estimates that GDP is growing at a rate of 5.4%.

GDPNow is what economic forecasters call a “nowcast.” In contrast to official US government estimates of GDP growth, which are released with a lag, nowcasts provide real-time guesses at GDP using currently available data. GDPNow relies on consumer sentiment surveys, manufacturing indexes, unemployment claims numbers, and a variety of other sources. That data are then fed into an algorithm that predicts GDP based on how correlated those numbers are to past performance.

GDPNow’s track record at predicting GDP growth has been pretty good. This is how it tracked official GDP from late 2011 to early 2014:

Generally, GDPNow tracks closely to actual GDP, though there was a period of excessive optimism at the end of 2012. There are reasons to think that the GDPNow is overly bullish now, too. The Blue Chip Financial Forecast, a respected projection based on the consensus of a set of business economists, sees GDP growth in the current quarter as 2-3%, and Blue Chip has a better track record than GDPNow. The Federal Reserve Bank of New York’s version of a nowcast has the US running at a healthy, but much lower, rate of 3.1%.

If GDPNow is too high, it might be because American consumers and businesses are irrationally exuberant about the impact of the recent tax cut, as well as Trump’s ability grow the economy through reduced regulation and higher infrastructure spending. Since GDPNow uses consumer confidence data, that overexcitement is reflected in the results. There is also a concern that people are now more politically motivated when responding to survey questions about the economy, and feel that their assessment of consumer confidence reflects their views of the Trump administration.

Still, even if GDPNow is overstating the health of the US economy, it’s a good sign. Trump’s forecast may be off, too, but not by as much as even the most optimistic observers have imagined.