As promised Wednesday, today let's look at the Federal Open Market Committee's monthly policy announcement and its relationship to GDP and economic activity in general. The first thing to note is the addition of the word "transitory" in the very first sentence of the FOMC's statement released yesterday.
"Information received since the Federal Open Market Committee met in March suggests that economic growth slowed during the winter months, in part reflecting transitory factors."
This is the equivalent of shouting in a text message by using ALL CAPITAL LETTERS, or answering a child's query of "Why?" with the response, "Because I said so." The Wall Street Journal also offered an excellent comparison of yesterday's FOMC statement to its previous statement.
The FOMC is making clear that it views the past several months of reports on economic activity underperforming expectations as a temporary phenomenon that has now passed and as a result does not merit consideration. This response, and putting "transitory" in the first sentence, was perceived as necessary by the Fed because the advance estimate of first-quarter GDP came in well below expectations, at 0.2% annualized vs. consensus expectations of about 1%.
This is where variety of other issues comes into play.
First is the Atlanta Fed accurately predicted the Bureau of Economic Analysis' announcement, as I discussed previously, while the majority of professional forecasters got it wrong. There is nothing new in the fact that the professional forecasters got it wrong, they traditionally do, and the error is because of an overestimation of what the BEA will announce.
The importance of this is that the Atlanta Fed's GDPNow model is designed to predict not what economic activity is but what the BEA is going to announce that it is. The GDPNow model is based on publicly available information that is used by the BEA. There is no secret to this and before the model's results started being offered publicly late last year, analysts could access the same information and anticipate what the BEA would announce.
It's not difficult to do. It doesn't require sophisticated algorithms, expensive computer systems or rocket scientists to calculate it. Many independent analysts do so on an ongoing basis and have always frowned upon the fact that the "professionals" get it wrong more than they get it right.
David Stockman, director of the Office of Management and Budget (OMB) during the Reagan administration, offered blistering commentary on the subject yesterday, and noted many of the issues I've raised in previous columns concerning the fact that many economic reports are deliberately structured so as not to provide accurate insight into real economic activity.
The difference now, specifically concerning the GDP report, is that the analysis is being publicly offered by a Federal Reserve Bank, rather than little people like me. The importance of that is that the staff economists at the Fed put the FOMC members and professional, private-sector economists on notice that there is no legitimate reason for not being able to anticipate very closely what the BEA will announce.
The Atlanta Fed is also putting the BEA on notice that if they announce something substantially different from what the GDPNow model forecasts, it is an indication that something is amiss that requires investigation. This is going to force professional economists to start publicly offering more realistic expectations, or lose credibility. It's also going to handicap the BEA's ability to massage data using subjective deflators.
This is a big change in the market place and it is going to increase as other Federal Reserve Banks begin offering their own "nowcasting" systems publicly.
I believe it is impossible for those charged with money management at the financial organizations employing the professional economists to rely upon their analysis for asset allocation decisions because if they did, the organizations would consistently lose money -- and we know that isn't happening.
Believing otherwise is the equivalent of believing you can solve a mathematical equation with faulty logic but still arrive at an accurate answer. It just doesn't happen.