Patterico's Pontifications

8/30/2011

The Unexpectedly Index

Filed under: General — Karl @ 10:12 am

[Posted by Karl]

ZeroHedge’s “Tyler Durden” understandably led with the depressing news that year-over-year real GDP growth now stands at 1.5%.  Apparently, since 1948, every time YoY real GDP has fallen below 2%, the economy has fallen into recession. Manufacturing is likely to look bad on Friday, too.

But the amusing-if-it-wasn’t-sad part of Durden’s report is an apparently unprecedented deterioration in global growth based on a proprietary realtime model I would rename the “Unexpectedly Index”:

Few pictures sum up this collapse in output better than the chart below which plots the three month change in the “Global Surprise Model” (GSM).  I created the GSM in the late 1990’s as a means of tracking how the most important (as measured by timeliness and market response) economic statistics were being reported relative to estimates.  Although Goldman, and later Citigroup, created comparable models in the early 2000’s, it remains a very useful tool for tracking the change in economic growth (2nd derivative) relative to consensus forecasts.
 
As shown, the current three month change is the largest in the history of the model.  In other words, the collapse in real-time economic data (such as ISM, German IFO, etc.) over the past three months is the sharpest of the last two decades for which data is available.

The accompanying chart at the link is not pretty.  I suppose the silver lining is learning Goldman and Citigroup take note of how badly their government-style economic forecasting models fail.  Admitting you have a problem is always the first step.  It is at least a step ahead of the Obama administration and the establishment media.  The establishment media seems more wedded to the idea of reporting “unexpectedly” bad economic news without ever reporting on the limits of macroeconomics as a science.  That phenomenon is probably related to the cult of experts to which most of the media and the Obama administration belong.  What results is a virtuous circle for progressives and a vicious cycle for everyone else.  To quote Arnold Kling:

[E]lected officials want results. They turn to experts who promise results. The experts cannot deliver. So the experts must ask for more power.

–Karl

15 Responses to “The Unexpectedly Index”

  1. Everyone (or at least the PTB in the Eastern Corridor) claims that the Great Recession ended in ?what? the Spring of ’09.
    What if that was, in effect, a “Dead Cat Bounce”, that was the result of Obama’s Stimulus, and the underlying structure of the recession still exists, and persists;
    meaning that we are now coming up on the end of the fourth year of this economic downturn?
    No Double Dip, just a continuation of our Lost Decade.

    Another Drew - Restore the Republic / Obama Sucks! (5a8b7e)

  2. the only sure investment any more is ammo….

    and reloading supplies.

    redc1c4 (fb8750)

  3. Sure John, go here:
    http://www.midwayusa.com/

    Another Drew - Restore the Republic / Obama Sucks! (5a8b7e)

  4. Karl you spelled unexpectedly wrong in the title,

    The Undexpectedly Index

    peedoffamerican (ee1de0)

  5. -Karl: “…experts must ask for more power.”

    We ALL need to remember that an “ex” is a has-been and a “spurt” is a drip under pressure. And THAT boys and girls explains why the “experts” keep screwing things up.

    GM Roper (d58b94)

  6. Yeah, but the misspelling by me is totes expected.

    Karl (37b303)

  7. one time me and Tyler Durden stopped by Sonic to get some tots and cherry limeade and Tyler was all “what do you think the marginal utility of a tot is?” and I was all jeez don’t start with that again please

    happyfeet (3c92a1)

  8. but you know Tyler

    happyfeet (3c92a1)

  9. feets, that was brilliant. Thank you for the chuckle.

    MD in Philly (3d3f72)

  10. One time I went to get Mcdonalds and happyfeet like teleported in front of me and stole my Big Mac and i was very sad…………….oh wait that was just a dream.

    DohBiden (d54602)

  11. But you know happyfeet *burp* Jeffy.

    And you also know a fictional character.

    Well done Pat or whoever you are.

    Michelle (ea14b7)

  12. Kind of hard to know where to start, but let’s begin here:

    The establishment media seems more wedded to the idea of reporting “unexpectedly” bad economic news without ever reporting on the limits of macroeconomics as a science.

    You – like everyone else who revels in this stupid “unexpectedly” meme – are railing against a decades-old reporting convention in financial news, literally nothing has changed except for your sudden interest in the topic. You should read through Bloomberg or Reuters articles from the 1990s, the reporting frame is the exactly same as it is today, and for good reason – the target audience is mostly interested in seeing the numbers in the context of what the market has presumably priced in.

    So when actual data comes in, it is reported, literally minutes later, as either in-line with market expectations (approximated to the median private sector forecast), or unexpectedly above or below expectations. The logic for the reporting convention speaks for itself.

    To your second error. These forecasts are not always from deterministic macroeconomic models. Sometimes they are from simple time-series models. Often they use a bit of both. You would know that if you’d spoken to just one person who has experience in this area. “Government-style economic forecasting model“? You could hardly make yourself sound more ignorant.

    The point is if you think there is some uniformity to the choice of model used by private sector firms – my goodness, you are sorely mistaken. There is intense rivalry between the forecasters to be the most accurate on the street, they are constantly working on refining their predictive models, and they use some macro theory (you do know there’s a wide spectrum of macro theory to choose from?) and some pure statistical techniques (wide spectrum again) to try to get an edge.

    If you assume that these forecasters represent a “cult of experts”, it is pretty obvious you have a wierd definition of a cult, or have never seen the spread of forecasts you get in the Bloomberg and Reuters polls. There isn’t anything close to conformity.

    You almost certainly missed this – Goldman, who you assume to belong to Obama’s cult of experts, have been very pessimistic on the economy once the stimulus ran off (they weren’t very optimistic before then either, as it happens, because they thought the stimulus was too small to have a deep and lasting impact). They have been highly skeptical of the administration’s confidence in a recovery. Basically, they’ve been right – their macro models have definitely not failed – accurately forecasting continuing high unemployment and anemic growth the last three years.

    So to recap then – you don’t understand economic forecasting, you don’t understand reporting conventions, you don’t know what specific firms have been forecasting, and you aren’t even aware that forecasters are in competition with each other.

    Did you have anything useful to say?

    Edgonzo (858b20)

  13. Comment by Edgonzo — 8/31/2011 @ 3:43 am

    We, the great mass of unwashed, are humbled before your Greatness.

    Another Drew - Restore the Republic / Obama Sucks! (f8e76c)


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