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GAUGING THE ECONOMY WITH “SMART TOOLS”

Growing inflation concept with businessman drawing growing simple graph, bokeh in background.

We live in a world of smartphones, smart cars, and smart televisions. So it may come as no surprise to hear that smart economics are trending, too.

The Federal Reserve is behind most of the smart tools. It has created some indicators that are considered “running estimates” based on the available economic data. Other firms have also moved into the “real-time” business and have started to provide estimates based on up-to-the-minute information.

Should individual investors follow these smart tools? In general, we would advise against it. Following indicators or markets too closely can cause you to overthink a well-structured strategy. But at the same time, it’s important to know a little about these new tools and how they are being used.

Real-Time Estimates

Most smart economic tools are seeing a rise in popularity because Wall Street is now very focused on inflation and interest rates. Most have been around for some time but are making a comeback because some investors are looking for up-to-date information. It’s important to remember that forecasts are based on assumptions and subject to revisions at any time. Financial, economic, political, and regulatory issues may cause the actual results to differ from the expectations expressed in the forecast.

Here’s a quick background on three smart tools that you may hear about when reading or hearing financial news.

Inflation Nowcasting

You can expect to see this tool discussed by economists right before the Bureau of Labor Statistics (BLS) gives its monthly update on the Consumer Price Index, the most widely followed measure of inflation.1

The Federal Reserve Bank of Cleveland sponsors the Inflation Nowcasting tool, which gives daily updates on inflation versus the monthly information provided by the BLS. By looking at the daily cost of certain items, the Nowcasting tool estimates what inflation will be in the final government report. Historically, it’s been reasonably accurate in its forecast.

The Cleveland Fed maintains records on its site starting from Q3 2013. But as you can imagine, with inflation at current levels, more attention has been paid to this tool in recent years.

GDPNow

You can anticipate this tool being discussed right before the quarterly update on the gross national product (GDP) by the Bureau of Economic Analysis.2

 

Atlanta Feds GDPNow Outlook

The GDPNow forecast for Q1 2023 GDP on March 10 was a bit more optimistic than Blue Chips consensus

In the graph, the Blue Chip consensus forecast starts at just below zero in late December and stays there until early February when it crosses zero and ends off at just above zero at the end of February. The Atlanta Fed GDPNow estimate starts at the end of January just below 1 and then shoots up to 2 by the start of February and stays between 2 and 3 until the start of March.

Probabilities are based on assumptions and are subject to revisions. As more monthly scores data becomes available, the GDPNow forecast evolves and generally becomes more accurate. However, the forecasting error can still be substantial just prior to the “advance” GDP estimate release. It is important to emphasize that the Atlanta Fed GDPNow forecast is a model projection not subject to judgmental adjustments. It is not an official forecast of the Federal Reserve Bank of Atlanta, its president, the Federal Reserve System, or the FOMC.

The Federal Reserve Bank of Atlanta manages the GDPNow tool, which is updated weekly and provides a real-time estimate of GDP. The tracker compares the GDPNow estimate to the Blue Chip economist estimate, which is compiled from 50 economists from America’s largest banks, manufacturing companies, and brokerage firms. (See accompanying illustration.)

The Federal Reserve Bank of Atlanta manages the GDPNow tool, which is updated weekly and provides a real-time estimate of GDP. The tracker compares the GDPNow estimate to the Blue Chip economist estimate, which is compiled from 50 economists from America’s largest banks, manufacturing companies, and brokerage firms. (See accompanying illustration.)

The Atlanta Fed made its initial GDPNow forecast in Q1 2018. This tool is getting more attention as concerns ebb and flow about a potential recession. 

CME Group’s FedWatch Tool

You may see this tool talked about prior to a meeting by the Federal Reserve’s Open Market Committee (FOMC), which holds eight regularly scheduled meetings during the year. (The Fed will meet more often during times of financial turbulence, such as during the 2020 pandemic.)3

The FedWatch Tool is updated daily and provides estimates on the likelihood that the Fed will change interest rates at the upcoming FOMC meeting. The CME Group is not connected with any Federal Reserve Bank.

The CME Group introduced the FedWatch Tool in Q2 2017. It’s in the spotlight because more attention is given to how interest rates can help manage inflation.

One benefit of these tools is they can help manage financial markets’ expectations prior to the release of economic data or the outcome of a meeting. But it’s important to remember they are not the final numbers, and they often over- and under-estimate the official government reports.

 

 


  1. ClevelandFed.org, 2023
  2. AtlantaFed.org, 2023
  3. CMEGroup.com, 2023

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