Will tomorrow's retail sales update for November bring pain or
pleasure for the increasingly delicate and high-stakes art/science of
deciding where the business cycle's headed? October's report
was somewhat sobering, thanks to a 0.3% drop in consumption—the first
since June. Some of the weakness was blamed on Hurricane Sandy. If so,
will November's numbers bounce back after a month of relatively clear
skies? Yes, according to the consensus forecast, which projects a
handsome 0.4% rise, according to Briefing.com.
Sounds good, but that's a bit high relative to a pair of econometric
models I routinely us for additional context when considering where the
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I crunched the numbers in two ways, using vector autoregression (VAR)autoregressive integrated moving-average (ARIMA) models, both of which also show up in my work with modeling the business cycle and nowcasting US GDP. As for today's retail sales projections, I'm using R software by way of the "forecast" and "vars"
packages. These tools optimize the parameters based on the historical
data records and so in some degree the resulting projections represent
benchmarks for evaluating forecasts from other sources.
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For the VAR projection of retail sales, I've chosen four data series
to search for interdependent relationships: US private sector
employment, personal consumption expenditures, disposable personal
income, and the University of Michigan Consumer Sentiment Index. By
contrast, the ARIMA projection uses only the historical data for retail
sales as the basis for looking ahead. Here's how the two estimates
compare for estimating the monthly change for November retail sales (in
nominal dollar terms):
Averaging the two forecasts gives us a +0.1% estimate. Keep in mind that the confidence intervals
for each of these point forecasts is, as usual, wide enough to keep us
humble for thinking that the future is clear enough to put a high degree
of confidence in one number. The potential for fairly large negative or
positive surprises, econometrically speaking, remains substantial.
Nonetheless, my take on the these two forecasts is that we should be a
bit more cautious in expecting a strong rise in tomorrow's report
compared with the consensus outlook. November is likely to show a modest
rebound from October, but I'm not expecting a large upside surprise.