Dueling Fed GDP Trackers - BBH
Analysts at Brown Brothers Harriman explained that the decentralized
nature of the Federal Reserve lends itself to both a division of labor
and competitive analysis.
Key Quotes:
"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 GDP Now 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."
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