It's that time of year when hope springs eternal: Baseball beckons, warmer weather is close and Q1 GDP will soon arrive. Ok, one of those things is not like the others, but March's impending conclusion means the end of 2017's first quarter-starting the countdown to the BEA's much-anticipated Q1 GDP release on April 28.[i] For those who can't wait and need economic data NOW, you may be tempted to get your fix from two appropriately titled data trackers: the Atlanta Fed's GDPNow and the New York Fed's Nowcast. Recent headlines have focused on the divergence between the two: The NY Fed Nowcast shows Q1 GDP growing almost 3% annualized against the Atlanta Fed GDPNow's 1.0%. So which outfit should investors pay attention to? In my view, it doesn't really matter. While this is a fun argument for economic data nerds to track, it probably doesn't mean much for your portfolio-forward-looking stocks have already mostly moved on, and GDP isn't the stock market.
The logical question to ask is, which GDP tracker has a better record for accuracy? Said differently, which gauge is more accurately at now now? But both nowcasts are relatively new: GDPNow became public in April 2014, while the Nowcast debuted two years later. While both seem to track GDP, there are some slight nuances in how they do so. Without getting too technical,[ii] GDPNow aims to replicate the official GDP figure by tracking-and basing its forecast on-the same components as the BEA. In contrast, the New York Fed's Nowcast uses a "Dynamic Factor Model" (DFM), which incorporates data not included in GDP, like sentiment surveys and employment indicators. Because the Nowcast uses different inputs to show how the broader economy is doing, official GDP isn't necessarily its baseline. However, most folks compare any nowcast to the BEA's GDP, so how do the GDPNow and Nowcast stack up?
Well, here is a chart comparing these nowcasts[iii] with the BEA's advance estimate of GDP.
Exhibit 1: GDP vs. GDPNow vs. Nowcast
Source: BEA, Federal Reserve Bank of New York and Federal Reserve Bank of Atlanta, as of 3/24/2017. GDPNow and Nowcast use final estimates before the relevant GDP release.
Based on these limited data, the Nowcast has more often overshot the BEA's estimate while GDPNow is almost an even split (6 overshot, 5 undershot).[iv] That said, this chart doesn't yield any major conclusions-if you can find a meaningful trend from those 26 bars, you have a more creative eye than me.
While nowcasts are interesting if you like tracking economic data, don't lose sight of the bigger picture: They don't tell investors what stocks will do next. Contrary to common perception, the economy and stock market aren't the same thing. GDP attempts to track the former by compiling a broad array of data, ranging from business investment to government spending. Then it crunches it all together[v] to arrive at a number that allegedly indicates what the economy did during a quarter. Stocks, on the other hand, are slices of company ownership-the private sector. While macro conditions like the broader economic environment do affect stocks, narrower factors tend to be more influential-see future company profitability and outlook, as well as sector-specific developments. Imports, which GDP thumbs its nose at, are a direct input to corporate profits, while-for many firms-government spending (which GDP counts as positive) doesn't factor in.
Most important: Stocks don't even consider "now." They are forward-looking. The most innovative nowcast can tell you only about developments that happened, not those to come. That doesn't mean GDP or the nowcasts are useless. They just won't tell you where the stock market is headed.
[i] For those of you who prefer the past, the third estimate of Q4 GDP will be released on Thursday, March 30.
[ii] If you are interested in the technical stuff, check out this paper for more. The authors are biased toward the New York Fed's model because it uses a dynamic factor model, but they provide some good background details on the nowcast debate.
[iii] Both the Atlanta Fed and NY Fed release their nowcasts on a weekly basis. The numbers in Exhibit 1 reflect the most current nowcast right before the BEA's announcement.
[iv] So does that mean the New York Fed is more optimistic than the Atlanta Fed and the BEA? Based on the New Yorkers I know, that seems out of character.
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