by Marc Chandler
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The decentralized nature of the Federal Reserve lends itself to both a division of labor and competitive analysis. Some Federal Reserve branches have alternative inflation measures and trade-weighted indices of the dollar. On the whole, this seems beneficial for investors and policymakers.One tool developed by the Atlanta Fed has been widely embraced. It is a tracking measure for US GDP using real-time data. Yesterday the New York Fed announced that it had created its own GDP tracker.
Before today’s disappointing retail sales report the Atlanta Fed GDPNow indicated that US had expended by a lowly 0.1% in Q1. Stagnation by another name as this is an annualized number. The NY Fed GDPNow estimated Q1 growth a 1.1%, while still not very satisfying, paints a somewhat different picture.
By the very nature of the tracking exercise, it should be expected that the estimates improve as the quarter progresses, and more data is available. The Atlanta Fed model incorporates 13 measures that feed into GDP and are recalculating them as new data is released. The NY Fed model is somewhat different in that it appears to look at a wider array of data and treats the data as news, as well as their dynamic interaction.
Both employ sophisticated statistical techniques. A priori it is difficult to know which one is better. The Atlanta Fed’s GDPNow is updated roughly twice a week while the NY Fed intends to publish updates of its model on Friday’s except for the blackout period around Fed meetings.
The point here is to bring to investors’ attention who use GDP forecasts to help create investment strategies that the NY Fed will have a GDPNow tracker. Investors will naturally compare the two, and this type of competition is healthy and benefits many. The existence of the ISM and PMI surveys, for example, or numerous measures of inflation or the trade-weighted dollar have not caused confusion. However, with alternative measures, it is important that one is cognizant of what is being measured, and its strengths and weaknesses.
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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