To Improve the Accuracy of GDP Growth Forecasts, Add Financial Market Conditions

The median estimate, which is in the center of the forecast distribution (orange line) is relatively close to the actual GDP growth rate of 2.34 percent (gray dashed line) at the end of the fourth quarter of 2018; however, the 95th percentile estimate predicts around 4 percent GDP growth, while the fifth percentile estimate predicts around −1 percent GDP growth. [...] Chart 2 shows how the forecast improves when adding data from the Chicago Fed National Financial Conditions Index as well as the stock price and interest rate spreads in Carriero, Clark, and Marcellino (2020) to forecasts for 2019 Q4-over-Q4 growth.2 Starting in mid-October, the median estimate of this forecast is on average closer to the observed outcome than the estimate from the model based pur. [...] Interestingly, the most recent estimate (as of April 28, 2021) suggests a 24.5 percent probability of GDP growth above 4 percent in 2022:Q1 (compared with a 22.2 percent probability in the real-time GDP forecast-only model).5 As in the previous examples, including financial market conditions reduces the volatility of tracking estimates of future GDP growth. [...] For instance, the median forecasts of 2022 Q1-over-Q1 GDP growth between February and April 2021 from the model with financial market indicators are centered around 3.2 percent, while those from the model with only macroeconomic indicators exhibit wide swings during the same period before reaching a similar level by the end of the forecast period. [...] The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.