Momentum. If you ever wondered what the single biggest factor that sets the trajectory of economic growth is, that's the answer. It's momentum.
For example, let's say you wanted to predict how big the U.S. economy would grow to be over the next few quarters, but you didn't know anything more than what the nation's GDP was during the last few quarters. More often than not, that's enough information to put you within a few percent of the actual GDP result. Even when the projection is off by more than that, it still tells you something useful about how the economy is performing.
That's the thinking behind the "Climbing Limo" forecasting method, which is a very simple approach to reasonably project what to expect for GDP. Here's how it works. Start with the most recently finalized quarterly GDP data you have available and the GDP recorded two quarters before that and draw them on a chart with GDP on the vertical axis and quarters on the horizontal. You would next connect those dots with a straight line, then extend that line three quarters into the future to draw a new dot at the end of that line. That's your forecast for that future quarter.
We've done that exercise in the following chart with the available GDP data for the period running from the first quarter of 2021 through the third quarter of 2023. In the chart, the blue solid line represents that actual nominal GDP data, while the orange dashed line represents the forecasted GDP, which starts at the second quarter of 2022 and run through the second quarter of 2024.
All but one of the forecast values on this chart are within three percent of the actual quarterly result after it was finalized in the Bureau of Economic Analysis' third estimate a few months after the quarter ended. As you can see, some forecast results are very close to the officially recorded finalized value.
The largest deviation between forecast and actual GDP is for the second quarter of 2022 (2022-Q2), where the forecast value is 3.3% higher than the actual value. That forecast is based on the actual GDP datapoints for 2021-Q1 and 2021-Q3 and represents how much larger GDP could have been if economic growth sustained the momentum it recorded between these two quarters.
That it isn't tells us something changed between 2021-Q3 and 2022-Q3 to affect the growth path for the U.S. economy. That's the kind of useful information we can extract from the chart whenever we see the deviation between forecast and actual data gets larger than a three percent threshold. It often signals a turning point.
In this case, 2022-Q3 represents when the Federal Reserve's actions to increase interest rates to combat the inflation unleashed in the U.S. economy between 2021-Q1 and 2021-Q3 started making their presence felt as a change in momentum for GDP.
The chart is unusual in that all the forecast values have run higher than the actual GDP figures. When we've done similar exercises in the past, we've typically seen the two data series cross over each other, with the data points well within that three percentage point margin. That pattern is what you would expect during periods when economic growth momentum is relatively consistent.
But instead of that pattern, the chart shows the period between 2022-Q2 and 2023-Q3 has been one in which the U.S. economy has experienced fading momentum.
The first estimate for GDP during the fourth quarter of 2023 will be released on Thursday, 25 January 2024. While not the final value, where it falls with respect to the forecast will give an idea of whether that fading momentum pattern continued through the end of 2023. We timed this article so you wouldn't have to wait long to find out. The references below will take you to where you can access the data you need and our climbing limo tool where you can do the math for yourself.
Update 26 January 2024
The first estimate of the United States' GDP in 2023-Q4 is now available, with nominal GDP being initially reported at $27,938.8 billion, which is 0.5% below the climbing limo estimate. The nominal GDP estimate for this quarter will be revised twice more before it is relatively finalized (outside of annual revisions) in March 2024. The climbing limo estimate for 2023-Q4 is based on the non-inflation adjusted GDP figures reported for 2022-Q3 and 2023-Q1.
References
U.S. Bureau of Economic Analysis. National Income and Product Accounts. Table 1.1.5. Gross Domestic Product. [Online Database]. Accessed 20 January 2024.
Political Calculations. Forecasting GDP Using the Climbing Limo. [Online Tool]. 10 May 2005.
Image credit: Microsoft Bing Image Creator. Prompt: "The side view of a limousine driving on bumpy rocks, highly detailed, 4k, award winning automobile magazine photography."
Labels: gdp forecast
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