Real-Time Forecasting in Practice
The U.S. Treasury Staff's Real-Time GDP Forecast System
By John Kitchen and Ralph Monaco
Ralph Monaco is an economist
with the Office of Economic
Policy, U.S. Department of the
Treasury. Previously, he was
President of the I.E.R.F., Inc.,
a not-for-profit economic
research corporation at the
University of Maryland in
College Park. He has been a
contributor to the Blue Chip Economic Indicators panel and has held positions in the
Department of Agriculture, the Central Intelligence
Agency, and the Council of Economic Advisers. Dr.
Monaco received his Ph.D. from the University of
Maryland in 1984.
This paper outlines a method for making effective use of monthly indicators to develop a current-quarter GDP forecast. Estimates and projections of real GDP growth are usually used to describe how the economy is doing. But estimates of GDP are only available quarterly, and the first GDP estimate for a quarter is released late in the month following the end of the quarter. The lack of a timely, comprehensive economic picture may mean that policymakers and business planners may be as much as four months behind in recognizing a significant slowdown or acceleration in the economy. This problem is especially important around business cycle peaks or troughs, where there may be some evidence that the economy is changing direction.
There are many less-comprehensive, but higher-frequency data series about the economy, however. The chief difficulty with using the multiple indicators is that different indicators can give different signals, and there is no agreed-upon way for aggregating the statistics to give a single-valued answer.
In this paper, we describe the approach we have adopted at the Treasury Department to use a broad variety of high-frequency incoming data to construct “realtime” estimates of quarterly real GDP growth. We draw on the recent work by Stock and Watson and others and describe the indicators, the techniques, and the recent performance of the system.