State Space Models

All state space models are written and estimated in the R programming language. The models are available here with instructions and R procedures for manipulating the models here here.

Thursday, January 12, 2012

US Real GDP Growth in 2012

The Financial Forecast Center (FFC here) produces a forecast for US nominal GDP. From the graphic above, FFC is expecting little growth in the first two quarters of 2012. FFC presents two confidence bands for each value. For example, in Jan 2012, FFC is forecasting nominal GDP at $15,333B. The 50% correct band would be +/- 112 while the 80% correct band would be +/- 225. The bands get bigger over time as expected but the GDP value stays at $15,433B through June of 2012, the end of the FFC forecast period.
I would prefer to forecast real GDP since it would not be clear for a nominal GDP forecast how much trends would be affected simply by prices (the GDP deflator). I would also rather forecast the attractor value since we are just coming out of the Subprime Mortgage Bubble and Collapse.

My attractor forecast for real GDP taken from the BEA (here) is presented in the graphic above. The bubble and collapse is clearly displayed. Currently we are at the lower 98% prediction interval for the attractor. This suggests that GDP will be drawn higher in 2012 (a return to the attractor value) unless other events (such as the EU sovereign debt crisis) continue to weight down the US economy (the mechanism of transmission here could be either a reduction in US exports to the EU or more financial contagion).

The FFC does produce a US Real GDP growth rate forecast (here and in the graphic above). The FFC is predicting a reduction in real GDP growth down to around 0.6% in the second quarter on 2012 (50% +/- 1.1% and 80% correct +/-2.4%).

My average annualized growth rate forecast for 2012 is 1.5% which is close to the FFC forecast of 1.6% for the first quarter of 2012. The FFC forecast of 0.5% growth in the second quarter of 2012 is possible but not that likely since the economy is not on its attractor value in the first quarter of 2010.

As a comparison, my mean annualized attractor growth rate for the period 2004-2007 was 1.6% while the actual mean annualized growth rate was 2.5%, 1 full point being attributable to the bubble.

NOTE: The attractor value results from a free simulation of GDPC96 starting in 1960 being driven by the state variables from the WL20 model. The WL20 model produces the best attractor as determined by the AIC criterion. A typical forecast predicts from year to year. The prior year contains shock and bubble values that bias the forecast.

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