Forecasting 2013-Q2's GDP

Now that the BEA has released its massive revision of GDP data going back to 1929, it's now worth our time and trouble to forecast where real GDP for 2013-Q2 will be finalized.

To do that, we'll be taking the data that the BEA has reported for the three most recent quarters for which it has finalized its estimates of the U.S.' real gross domestic product and applying our "modified limo" technique for forecasting the nation's GDP for the second quarter of 2013. While the BEA has already put forward an initial estimate of real GDP in 2013-Q2 of $15,648.7 billion in terms of chained 2009 U.S. dollars, that's really just their first estimate for the figure. What we're really looking to forecast is the value that will be recorded in the BEA's third estimate, which won't be reported sometime late in August 2013.

Since our modified limo method only incorporates finalized data in its formulation, and not initial estimates, the value of the first estimate that the BEA has already reported will neither affect nor alter our forecast value. If we had known how the BEA was going to revise GDP to incorporate the relatively intangible elements of the economy such as research and development activities in the private sector, we could have obtained the results we'll present today over a month ago, long before the BEA published its first estimate for real GDP in the second quarter of 2013.

That's because our modified limo forecasting technique is really an inertia-based method for projecting what real GDP will be in the future, which is based upon the very recent performance of the economy. It is most accurate when the economy is growing at a steady rate, at least, as measured over two-quarter long periods of time, and even provides insight in those cases when it is off target, as that indicates a situation where the economy is turning a corner, so to speak, either positively toward expansion or negatively toward contraction.

Let's do some math, shall we? We've entered the data for the three most recent quarters for which the BEA has revised its data at least three times already (2012-Q3, 2012-Q4 and 2013-Q1):

Previous Quarters Inflation-Adjusted GDP Data
Input Data	Values
Three Quarters Ago (Billions of Chained U.S. Dollars)
Two Quarters Ago (Billions of Chained U.S. Dollars)
Most Recent Quarter (Billions of Chained U.S. Dollars)

Next Quarter's Inflation-Adjusted GDP Estimate
Calculated Results	Values
Modified Limo Estimate (Billions of Chained U.S. Dollars)

From that data, we find that the midpoint for our forecast range for real GDP in 2013-Q2 is $15,609.0 billion in terms of chained 2009 U.S. dollars, which is nearly $40 billion, or 0.25%, below the BEA's first estimate for the quarter, as the early indication that the U.S. economy performed slightly better in 2013-Q2 than a simple inertial trajectory would project.

We find the following probabilities for where GDP will be finalized for the quarter:

• There is a 68.2% probability that real GDP will fall between $15,437.8 and $15,754.3 billion.


• There is a 95.0% probability that real GDP will fall between $15,292.3 and $15,925.6 billion.


• There is a 99.6% probability that real GDP will fall between $15,133.9 and $16,084.0 billion.

And of course, there is a 50% probability that it will be finalized at a value above our midpoint forecast value of $15,609.0 billion. And actually better than that, as the BEA's first estimate for the quarter indicates it is above that value.

The chart below visualizes our forecast, and gives the first hint of what 2013-Q3 might look like, if 2013-Q2's GDP is finalized at its currently estimated value of $15,648.7 billion:

Although the early data favors real GDP being recorded above our forecast midpoint value, that's really not saying very much, as the overall level of economic growth suggests that the U.S. economy is experiencing recessionary conditions, and has been since the third quarter of 2012, as confirmed by our GDP growth rate temperature gauges shown at the top of this post!

But then, while that may be a surprise to people who believed the BEA's pre-revision estimates of GDP through 2013-Q1, which didn't indicate much potential of recession, it's old news to our readers, who know that we have other, more reliable methods than the federal government has for telling when the pace of economic growth has become too cold.

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Dividends: U.S. Economy Exiting Recession

The number of public U.S. companies announcing that they would be cutting their future dividend payments fell from 20 to 14 in July 2013. While this level of dividend cuts announced in a single month is still consistent with recessionary conditions being present in the U.S. economy, it does represent an improving situation as it appears that the U.S. economy is beginning to exit the microrecession that began back in July 2012.

By our definition, a microrecession represents a period of slow or negative economic growth for the nation that is either too limited in scope, severity or duration to qualify as an official period of recession, as might be determined by the National Bureau of Economic Research.

We'll note that the Bureau of Economic Analysis' recently revised GDP data now confirms what our dividend indicator has been communicating in real time - the pace of economic growth in the U.S. has been in the "cold" recessionary zone, as indicated by our two-quarter GDP growth rate temperature gauge:

Prior to its revision, the BEA's GDP data had indicated that the U.S. economy was growing at a somewhat faster pace.

As best as we can tell, it appears that the microrecession peaked in the fourth quarter of 2012. The U.S. economy would now appear to be exiting this period of microrecession, which has now lasted for over a year.

References

Standard and Poor. Dividend Action Report. [Excel spreadsheet]. Accessed 5 August 2013.

U.S. Commerce Department Bureau of Economic Analysis. Current-Dollar and "Real GDP". [Excel Spreadsheet]. Accessed 31 July 2013. - Note: Inflation-adjusted figures are actually presented in terms of chained 2009 U.S. dollars (not chained 2005 U.S. dollars).

Summer Jobs 2013: Zero New Jobs for Teens

The most remarkable thing was documented in the July 2013 employment situation report. There was absolutely no change in the number of employed teens in the United States from June to July 2013.

Zero. Nil. Zip. Nada. Zilch.

Meanwhile, the number of young adults Age 20 through 24 who were counted as having jobs increases by 49,000, while the number of adults Age 25 or older rose by 178,000, for a total month-over-month increase in the number of Americans with jobs of 227,000, which was enough to lower the official unemployment rate in the U.S. to 7.4%.

That increase puts the total number of employed Americans at 144,285,000. Of these, 126,162,000 are Age 25 or older and 13,654,000 are between the ages of 20 and 24.

Meanwhile the number of teens with jobs in July 2013 is 4,469,000. Which just happens to be exactly the same number of U.S. teens that were reported as having jobs in June 2013.

It would seem that President Obama has once again failed to help teens get summer jobs, as both he and a large number of Democratic Party mayors across the nation who partnered with the President this past April appear to have been completely impotent in their efforts to create any notable improvement in summer job opportunities for U.S. teens in their communities this summer.

That 11 April 2013 discussion would appear to be the last time that President Obama paid any attention to the stagnant employment situation for U.S. teens, as he certainly isn't considering teens at all in his latest pivot to jobs.

Which means that zero change in the number of teens with jobs this summer fully reflects the level of effort that President Obama has exercised on their behalf, which in turn tells us quite a bit about the priority he places upon their plight.

If only the President cared about American teens more....

S&P 500 Hits 1700 A Month Late

On 1 August 2013, the S&P 500 closed above 1700 for the first time in its history.

That was almost exactly one month later than it should have. Let's revisit one of our now rare public predictions for stock prices, from back on 10 June 2013:

Overall, it was a really boring week, but at least it set up a fun, seeming paradox for our favorite chart. Given the nature of how the moving average of the change in the growth rate for stock prices works, we'll soon see the 20-day moving average for the S&P 500 top out then fall back toward the green line (where it really wants to be), even as the value of the S&P 500 itself rises.

In the relative absence of noise in the market, that would create the potential for the S&P 500 to reach 1700 before the end of June 2013.

But then, noise is always present in the market. It's its volume that's what's random and unpredictable!

A little something we like to call The Bernanke Noise Event intervened in that forecast for the future, throwing the market off track for a whole month, the recovery from which was then drug out a little longer by a poorly considered trial balloon put out by the White House proposing Larry Summers as the leading candidate to be nominated to run the Fed after Ben Bernanke's current term expires in January 2014.

But that new noise began to dissipate when the White House gauged the market's negative reaction and began to float the name of an alternative candidate on Wednesday, 31 July 2013, as the Fed also continued its efforts to repair the damage done by Bernanke back on 19 June 2013. By the next day, enough of the noise of Summers had decreased to allow the S&P 500 to finally close above the 1700 mark.

The chart below shows where we're at today. Mind the comments in our chart above and note the differences from previous versions (hey, if the Fed's Open Market Committee can get by on tweaking the otherwise same statement from meeting to meeting, so should we be able to get away with doing the same thing on our S&P 500 stock prices and dividends per share acceleration chart!)

Previously on Political Calculations

Unless it becomes relevant as events develop, this is probably the last time that we'll feature the following chain of analysis in considering the major market drivers this summer.

• How Stock Prices Work - The basic theory for why "Which Future?" is the most important question for investors to answer.


• The Math Behind How Stock Prices Work - Just as advertised. Welcome to chaos!


• Whither Dividend Futures - we tell you exactly where we get our data. Between this and our math (linked above), you can do this kind of cutting edge analysis too....

Next, that electronic trail of analysis we've provided throughout the event:

• The World Investors and the Fed Live In Now - Our snapshot of the market right before the event, in which we note that investor concern about the future of QE was growing and remark that there will be a market reaction in response to the outcome of the Fed's two-day meeting later that week.


• The Bernanke Noise Event - as the Summer of 2013 shall ever be known to investors....


• Now Is It Time to Sell? - according to statistics, a quaint branch of mathematics that only works to describe how stock prices vary with respect to their trend when order is present in the market. The problem with it is that the market goes in and out of order, so it's periodically pretty useless....


• The Fed's Real QE Mistake: Timing - We explain how Bernanke really screwed up.


• Now What Will You Do? - the statistical line is crossed! We look at everything that we see screaming "sell", without actually saying it's time to sell.


• The Fed Attempts to Walk It Back - we anticipate how the Fed will respond to Bernanke's error, and we determine if it will work.


• The GDP Multiplier for QE - Not about investing, at all! Instead, we explain why sustaining QE at current levels is so important to the U.S. economy at present.


• "Never Bet Against the Fed" - we visually illustrate that the Fed's response to repairing the damage from Chairman Bernanke's blunder is working and recap why fears of stock market doom, despite signals to the contrary, were really overblown.


• Bernanke Closes the Gap - we mark the end of the Bernanke Noise Event.


• The Noise of Summers - we note the beginning of a new negative noise event....

Inflation and the Batman

This is cool - via Core77, Mashable has determined the cost of living for a number of superheroes in the year they first hit the scene and today, and presented the information in the form of a comic book cover:

Also featured: Superman, Spider-Man, The Hulk and Wolverine in addition to Batman!

Visualizing the GDP Revision

How did the overall level of reported GDP change as a result of the BEA's finally including research and development (R&D) and also arts and entertainment (A&E) production as part of U.S. GDP?

Here, both R&D and A&E are now being accounted for by the BEA as fixed assets rather than as intermediate components of producing goods and services, which effectively boosts the reported level of GDP.

To find out, we first converted the pre-revision data from being in terms of inflation-adjusted, chained 2005 U.S. dollars to be in terms of inflation-adjusted, chained 2009 U.S. dollars, which we've presented as the green line in our chart below. We next charted the newly revised real GDP figures being reported by the BEA as the black line, then drew lines between the various quarterly data points to help visualize how much the data changed from the previous revision.

In this chart, which presents all of the BEA's quarterly data for GDP from the first quarter of 1947 through the first quarter of 2013, we find that R&D and A&E production had very little impact on GDP up until 1983, when it finally reached a share of 1% of real GDP. Ten years later, that share of GDP had doubled, and through the first quarter of 2013, has now reached a share of 3.5% of the real U.S. economy.

Our next chart focuses on the data since the first quarter of 2000.

The main news for this period is that with the revision, the 2007 recession was not as deep as previous data indicated, and the recovery was somewhat stronger.

But perhaps the most surprising revision in the data applies for the first quarter of 2011, when GDP appears to have contracted, as the data had previously indicated slightly positive growth. White House economist Alan Krueger blamed the economic shrinkage on the disruption to world supply chains stemming from the Japanese tsunami.

That particular event occurred on 11 March 2013, just 19 days before the end of the first quarter of 2011. In reality though, most of that effect wouldn't show up in the U.S. economy until the second quarter of 2011, since the transit times between the U.S. and Japan for cargo are such that any trade between the two that would be recorded in the economic statistics for the first quarter in 2011 would already have been en route at the time of the tsunami and would only need to be re-routed to non-damaged port facilities in Japan, an observation that is backed by trade data recorded for both March and April in 2011. Meanwhile, plants shut down in Japan as a result of the event would not affect production at U.S. facilities for several weeks following the event, and many U.S. facilities of affected Japanese companies, which would be the most likely to be impacted, continued production without any stoppages.

Since most of the adjustment related to the BEA's data revision affects GDP data since 1980, we thought it might be fun to present large-scale versions of our GDP temperature gauge charts. The first of these charts shows the one-quarter real annualized GDP growth rate for each quarter from 1980-Q1 through the first estimate of the GDP growth rate for 2013-Q2:

Our next chart presents the annualized two-quarter real GDP growth rate for each quarter from 1980-Q1 through 2013-Q2. Since this data is much less subject to volatility, we use it for forecasting, as it provides a more accurate picture of the pace of economic growth in the United States over time:

These charts provide an indication of how strong the U.S. economic growth rate is, which can range from a "hot" red (growing at a rate greater than 5.5%) to a recessionary "cold" purple (growing at a rate less than 1.5%).