Unexpectedly Intriguing!
October 23, 2006

We've been peering into our crystal ball here at Political Calculations - the one that only looks at the past to tell us the future - to tell us where the U.S. Gross Domestic Product will be. When we want to forecast GDP, we turn to our "Climbing Limo" tool to create our crystal ball predictions. And what we've found in the future of the next three quarters is presenting more questions than we have answers.

What kind of questions, you ask? Well, for starters, how about these:

  • How much will the combined impact of Hurricane Katrina and Hurricane Rita have on the upcoming release the latest GDP data this week?
  • Is the stock market climbing significantly now in reaction to surging economic growth three to six months from now?

We present the following table, which we generated using historical data and the forecasts viewed through our crystal ball to underscore why we're asking these questions. We've highlighted the data for the economic quarter that will be released later this week:

Historical and Forecast Quarterly U.S. Real GDP
Year-Quarter GDP (Real, $billions) Smoothed Growth Rate (2 Quarters) BEA Growth Rate (1 Quarter) Comment
2007-Q1 11733.0 5.72% 3.76% Forecast Using 2005 Q4 thru 2006 Q2 GDP data.
2006-Q4 11625.2 4.21% 7.71% Forecast Using 2005 Q3 thru 2006 Q1 GDP data.
2006-Q3 11411.3 1.68% 0.82% Forecast Using 2005 Q2 thru 2005 Q4 GDP data.
2006-Q2 11388.1 4.06% 2.56% Historical data.
2006-Q1 11316.4 3.65% 5.58% Historical data.
2005-Q4 11163.8 2.97% 1.76% Historical data.
2005-Q3 11115.1 N/C 4.18% Historical data.
2005-Q2 11001.8 N/C N/C Historical data.
* N/C = Not calculated.

Analyzing the Results

In looking at this backward-looking data, we observed that the lousy real-GDP number we expect this upcoming Thursday was set by the impact of the two major hurricanes that knocked out the U.S.' Gulf Coast's economic production back in the third and fourth quarter of 2005! Why might this be the case, nearly a year after the hurricanes?!

Our best thinking is that a major economic shock, like the effect of a hurricane, shifts economic activity away from when it happens into the future. Where an event is largely forecastable, like a hurricane, this generally means that short term economic activity is shifted - you see a dip for the month of the hurricane that's fully recovered in the following months. Intermediate term economic activity, which is driven primarily by business contracts between six and eighteen months of duration, is largely unaffected, while long term economic activity is nearly entirely unaffected.

What separates the effects of Hurricane Katrina and Hurricane Rita from regular, garden-variety hurricanes is that they caused enough damage, and worse, unpredictibility, to enter the economic calculations of millions of people and thousands of businesses that the effect of these hurricanes is affecting intermediate term economic activity. People and businesses shifted when they started their intermediate term contracts enough, until the full hurricane season of 2005 had passed - and even until when the hurricane season of 2006 would pass, to avoid this risk. We hypothesize that's why our tool may well forecast why this week's GDP data will come in far below the previous quarter's level.

That also leads us to the GDP forecasts for the quarters following this quarter: our tool foretells of some really impressive growth levels! In looking at this data, which will come out three to six months from this week, we can't help but remember the old investor's axiom that the stock market "looks ahead" six months. We wonder if the market isn't anticipating the same growth that our tool seems to indicate is coming.

Hey, if all these predictions pan out, maybe we'll open up a fortune-telling shop!

About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

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