Modern Version of Man vs. Machine - Economist vs. Spreadsheet by Dr. Van Tharp Trading Institute Courses and Workshops
I remember the "man vs. machine" stories that I heard in my youth - mythical Paul Bunyan vs. the chainsaw and the legendary John Henry (the steel drivin' man not the current Red Sox owner/commodities trader) vs. the steam drill. These were larger than life characters who were the best in the world at what they did and met their match at the hand of machines.
Today's version of the story pits all those highly paid Wall Street economists against computer models. Actually, in the case of GDP forecasting, the economists may have met their match in a spreadsheet.
And just like in the stories of Paul Bunyan and John Henry, the machine is winning.
The GDPNow Model - So Far, So Good (in fact. . . very good)
On July 10, 2014, the Federal Reserve bank announced a new forecasting model it called GDPNow. You can read Atlanta Fed Sr. Economist Pat Higgins' blog post on the subject.
Since you'll want to follow this forecasting model, you should read that post from the research department. It gives a simple-language explanation about the model and does a good job delineating its strengths and weaknesses and links to the working paper that gives the model's technical documentation.
In short, here's what the forecasting model does: it uses real-time inputs from the 13 different subcomponents used to calculate GDP and updates those as they are available throughout the quarter. To illustrate this visually, here's the graph from the Atlanta Fed's website for the current quarter's numbers:
This morning's GDP growth figure for the first quarter was a lowly 0.2% which sent the US dollar scurrying down in morning trading. How did the economists do vs the GDPNow? As you can see from the chart below, GDPNow forecast 0.1% while the consensus among Wall Street economist was 1.4%.
So how has the model done in other quarters? Actually, it has performed really well overall. The model has been tracking GDP since 2011 and has had an average difference of 0.68 percentage points from the actual results. In low-growth quarters (those with forecasts below 1%), however, the GDPNow model has done much better - within 0.3% per quarter. That last figure did not include today's first quarter forecast so the revised figure will be much lower.
If you are interested in seeing up-to-date information, you can find the model's forecast at Atlanta Fed's website.
This page alone is quite rich in detail. Be sure to check out the tabs below the chart for a good FAQ section and lots of other useful material.
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