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Q4:2012 US GDP Nowcast Update | 1.07.2013

 January 07, 2013 09:23 AM


The US economy is expected to grow 1.6% in 2012's fourth quarter, according to The Capital Spectator's average econometric nowcast. That's up slightly from the previous 1.5% nowcast, published on December 17. The current outlook for 1.6% growth looks sluggish when compared with the 3.1% rise for Q3, as reported by the Bureau of Economic Analysis (BEA). The official Q4 data is scheduled for release on January 30, when the BEA will publish its initial GDP estimate for the last three months of 2012. (GDP percentage changes are quoted as real seasonally adjusted annual rates.)

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Our current Q4 nowcast is based on the latest economic indicators available through January 4, which reflects an incomplete profile in terms of the December numbers. As the remaining updates for last month roll in, there's a chance that the Q4 nowcast will rise. Several key reports for December are due next week, including retail sales, industrial production, and housing starts. But with most of Q4's numbers already published, the odds are dwindling for a substantial upside revision for our nowcast. Keep in mind too that if numbers yet to come are considerably weaker than expected, the Q4 nowcast may fall.

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Meantime, here's a look at the individual nowcasts:

Next, here's a recap of how our nowcasts for Q4:2012 GDP have evolved in real time over the last two months:

Finally, here's a brief profile for each of The Capital Spectator's nowcasts:

R-4: This estimate is based on a multiple regression in R of historical GDP data vs. quarterly changes for four key economic indicators: real personal consumption expenditures, real personal income less government transfers, industrial production, and private non-farm payrolls. The model estimates the statistical relationships from the early 1970s to the present. The estimates are revised as new data is published.

R-10: This model also uses a multiple regression framework based on numbers dating to the early 1970s and updates the estimates as new data arrives. The methodology is identical to the 4-factor model above, except that R-10 uses additional factors—10 in all—to nowcast GDP. In addition to the data quartet in the 4-factor model, the 10-factor nowcast also incorporates the following six series:

• ISM Manufacturing PMI Composite Index
• housing starts
• initial jobless claims
• the stock market (S&P 500)
• crude oil prices (spot price for West Texas Intermediate)
• the Treasury yield curve spread (10-year Note less 3-month T-bill)

ARIMA-GDP: The econometric engine for this nowcast is known as an autoregressive integrated moving average. This ARIMA model uses GDP's history, dating from the early 1970s to the present, for anticipating the target quarter's change. As the historical GDP data is revised, so too is the nowcast, which is calculated in R via the "forecast" package, which optimizes the prediction model based on the data set's historical record.

ARIMA 4: This model is similar to the ARIMA technique above in terms of the econometric application, but with a key difference. Instead of using historical GDP data as a lone input, the ARIMA 4 model analyzes four historical data sets to predict GDP: real personal consumption expenditures, real personal income less government transfers, industrial production, and private non-farm payrolls.

VAR-4: This vector autoregression model uses four data series in search of interdependent relationships for estimating GDP. The historical data sets in the R-4 and ARIMA 4 models above are also used in VAR-4, albeit with a different econometric engine. As new data is published, so too is the VAR-4 nowcast. The data sets range from the early 1970s to the present, using the "vars" package in R to crunch the numbers.

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