Wednesday, July 1, 2020

Wildly Off Forecasts?

The macroeconomic forecasting business has become quite unhinged in the current situation, with existing models seeming to have their wheels coming off as old relationships simply do not hold and reported data seems unreliable and going in all sorts of directions.  We have already seen this happen regarding forecasts that were made for the May employment numbers, with most forecasters projecting employment declines that would have been more than 10%, some of them by a lot more than that, although none more than 20%. But in the end employment was estimated to have grown by over 2%, a situation of the forecasters simply being wildly wrong.

As it is, with the month of June now over and thus the second quarter over, it looks increasingly to me like most of the forecasters have not learned their lessons from that May employment fiasco.  I suspect that in many organizations they find it hard to revise their models, especially on short notice, even when it is clear their models are not working.  We see a lot of the forecasters making predictions of a large second quarter decline in GDP, but more numbers have come out for May, and most of them have been positive, some of them very positive, and if June continues to be positive, even if at a lesser rate than May given renewed shutdowns occurring due to the uptick in Covid-19 infections as June proceeded, this may further make some of these strongly negative forecasts even further off.

So what are some of these forecasts and what do the latest reported numbers look like?  First we must note the first quarter outcome.  It seems that GDP declined by -4.8% or 5.0% for the first quarter at an annualized rate.  All of the decline occurred in March, more than offsetting modest growth in both January and February. 

But the forecasts for annualized rates of decline for the second quarter are awesome, at least most of them.  I am getting these from a post by Menzie Chinn over on Econbrowser and are from less than a week ago on June 26.  Here are some:
GDPNow -39.5%
New York Fed -16.3%
St. Louis Fed -38.16%
IHS Markit -35.3%.

Clearly rhe only one not showing a massive decline is the New York Fed.

Menzie  also showed how the forecasts have evolved for two other forecasters.  A blue chip group's forecast was for a -25% rate on April 30, but slid to -35% by June 5.
The Atlanta Fed has had its forecast make large movements, starting out at a relatively modest -12% as of April 30, but then plunging to a whopping -54% as of June 5, but then in the face of more recently improving data by June 26 this forecast had moved to not a not quite as whopping -40%.

So what does estimated data look like?  One estimate I have seen for the month of April had the actual decline of GDP being -11.4%, which translates to about a -42% annualized  rate.  But we already see here the danger for all of those forecasts listed above except for that of the New York Fed.  It is near certain indeed that the economy has been growing in both May and June.  If so that annualized rate of -42% looks to be a definite outer bound.

Now if there has been barely any growth in May and June we might still see numbers in the 30s for the annualized rate of decline.  But at least for May the numbers do not look like that.  We have already seen employment grow at over 2%, which is the actual growth, not the annualized, which is much higher.  We now have an estimate for consumption, which grew at over 17% in May. Given that consumption is on the order of 70% of GDP that is pretty much the ballgame right there, barring some sharp turnaround in June.  This is especially the case as estimates of construction also seem to show sharp growth in May, a major component of investment, although if inventories fall sharply, that might offset the construction increase.  State and local governments were almost surely declining and probably still are, but probably not a massive rates.  Trade is especially hard to predict, with indeed net exports appearing to decline in April by somewhere between -7 and -16%.  But exports might actually be rising now as much of the world economy appears to be growing again.

The apparently steep decline of GDP in April will be hard to overcome during these past two months.  But it is not out of the question that we might actually see a slightly positive figure for the quarter, especially if it turns out that growth in June continued to be as strong as it looks like May was.  But even if it flattened out some as I suggested might happen in a recent post, it looks to me that the sharply negative predietions still being held to by so many forecasters simply look to be way off.  Even the much less negative New York Fed may prove to have been too negative, even if indeed the quarter outcome is still negative overall for GDP growth, with it probably going to be more than a month before we shall know at all reasonably.

I conclude by noting that even if second quarter is positive or only mildly negative, growth prospects going forward for the near future look less promising.  This is not only because of the recent spiking of Covid-19 cases with associated shutdowns, but also because portions of the large fiscal stimulus that has been going on and has probably aided the recent growth will have disappeared or will do so unless Congress acts to keep them going.  In particular, the individual stimulus checks have ceased, and the expanded unemployment benefits are scheduled to cease at the end of July.  What is more certain is that we are truly profoundly uncertain about what will transpire in the next few months.

Barkley Rosser

10 comments: said...

As of this morning, July 2, more wildly off forecasts. Employment growth numbers reported for June, growth of 4.8 million jobs. I heard on the radio that is twice what was being forecast by "official experts." I am sure this is slowing down now and possibly reversing with the coronovirus surge and new rounds of layoffs. But for second quarter more generally it looks like the most widely used models are just not doing very well. The situation has just changed too much, and they do not have enough new data to reestimate the faulty parameters in the models.

ilsm said...

"Making predictions is really hard, especially about the future".

Yogi Berra

Happy Independence Day!

Fred C. Dobbs said...

Dow Jones Eyes 1,000 Point Weekly Gain As Apple, Microsoft Stock Near Highs

via @IBDinvestors - July 2

Stocks moved off session highs but held solid gains Thursday
afternoon as the Dow Jones Industrial Average rose 250 points.

The Nasdaq rallied 1.2%, the Dow Jones industrials rose 0.9% and the S&P 500 advanced 1% in the stock market today. Small caps tracked by the Russell 2000 added 0.8%. Volume was mixed, higher on the NYSE but lower on the Nasdaq, vs. the same time Wednesday.

The Dow surged as much as 470 points earlier, after the Labor Department reported a 4.8 million jump in June payrolls. That topped estimates for a 3 million increase. The unemployment rate fell to 11.1%, vs. a 12.4% forecast and May's 13.3%.

Jobless claims last week came in at 1.42 million, slightly higher than an expected 1.4 million. ... said...


Happy Independence Day back.


I stay away from trying to forecast the stock market. I do note that NASDAQ has gotten back into all time high range recently.

Over on Angry Bear Anne reposted an interesing post by Dean Baker. He notes that the sectors with the most hiring are construction, manufacturing, and health care, the latter somehow not surprising. A bit of a surprise is that the state and local sector actually had net hiring, something I did not expect. That was due to hiring by local governments, while there were net layoffs by state governments. Dean forecasts the situation will turn around for local governments, and I think that is quite likely. He also noted that there was a large number of people withdrawing from the labor force. Growth has been going on on net, but it is very uneven, and clearly likely to slow, although there continue to be reopenings, with my state, Virginia moving to Phase 3 just yesterday. But all that will be coming to an end pretty soon, I suspect.

Fred C. Dobbs said...

It's all about those 'W' recoveries.

The market is incredibly unpredictable,
but one can look at it at least in askance.

The Big 4 (Apple, Microsoft, Amazon & Google)
are now comfortably (?) $Trillion stocks. Some
kind of 'flight to quality' by investors, it seems.

You must wonder, what is up with that?

ilsm said...

The only outlier on Fred's Big 4 is Apple. Microsoft belongs in the group, although 2 years ago I did not expect that.

The three can lead in pandemic altered markets.

Fred C. Dobbs said...

Apparently, bond investors disappointed by
very low interest rates are buying equity
shares. Both Apple & Microsoft pay decent

Fred C. Dobbs said...

(2) Warren Buffett Stocks You Can Buy and Hold for the Next Decade


4. Amazon
... Amazon has served as a lifeline for its customers during the COVID-19 crisis. The e-commerce giant's services have never been more valuable, and they should only grow in importance as more retail sales shift online in the years ahead.

... Countless people shopped on for the first time during the coronavirus crisis, and now that they've experienced the savings and convenience the online retail colossus provides, many will remain loyal customers. ...

(Amazon pays no dividends. Neither does Berkshire Hathaway.)

5. Apple
A list of Buffett's favorite stocks is incomplete without mention of his largest position: Apple

Berkshire Hathaway owns a staggering $88 billion worth of Apple's stock, making it Buffett's biggest bet by far. ...

(Berkshire Hathaway earns about $800M per year in Apple dividends, from about 244M shares owned.)

Fred C. Dobbs said...

Hmmm. Berkshire Hathaway appears to be
earning less than 1% on their Apple
investment, meaning they overpaid
for their shares, it would seem.

Fred C. Dobbs said...

Unless, of course, the $88B figure represents
what the shares are worth, not what they cost.
which is almost certainly far less.