The Outlook For Investors
Published Friday, October 27, 2023 at: 7:41 PM EDT
Algorithms by staff economists at the two Federal Reserve district branches are forecasting twice the growth predicted by human experts.
Staff at the New York Federal Reserve District Branch and the Atlanta district branch both designed algorithms to predict the present growth rate of U.S. gross domestic product (GDP), and they are published on their websites. When the government releases employment, personal income or other components of GDP, the Atlanta Fed’s “GDPNow” algorithm, for example, updates its forecast to reflect the new data. Nowcasts for inflation and other key economic data are also sponsored by the Federal Reserve System.
Nowcasts demonstrate the Fed’s commitment to transparency and democratization of information as well as American exceptionalism. Empowering the 12 district branches to publish continually updated real-time estimates of U.S. GDP growth increases investor transparency of the statistics that drive investment prices.
To understand the importance of Fed district branch nowcasts, consider this chart showing the consensus forecast of 60 human leading economists surveyed quarterly by The Wall Street Journal. They are predicting a growth rate a tick less than 1% for the fourth quarter of 2023 ending December 31. In comparison, the algorithm from the Atlanta Fed is projecting a 2.3% growth for the final quarter of 2023. The New York Fed’s nowcast is for GDP growth in the fourth quarter of 2.6%.
The point is that third-quarter growth came in at 4.9%, which was much stronger than human economists predicted. Economist Fritz Meyer says it’s hard to imagine the economy slowing to less than a 1% growth rate in the fourth quarter after a gangbuster 4.9% rate in the third quarter.
The nowcasts from the Federal Reserve district branches have been more accurate than human economists for many months and that could be what’s happening now. If the Fed algorithms are right, the expansion that defied expectations in the first three quarters of 2023 may fool the consensus of experts yet again in the fourth quarter and in 2024.
The strength of the economic data released this past week caused stock prices to weaken sharply. The stock market is usually an indicator of what will happen in three or four months, and investors appear to be concluding the strength of the economy could warrant another rate increase by the Fed or policymakers may decide to maintain high rates for longer to ensure inflation is no longer a serious threat.
The Standard & Poor’s 500 stock index closed Friday at 4117.37, down -0.48% from Thursday. After losing 2.39% last week, the S&P 500 lost another -2.53% this past week. The index is up +84.02% from the March 23, 2020, bear market low and -14.16% lower than its January 3, 2022, all-time high.
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