Macro Focus: Nowcasting 2020 Q2 GDP and forecasting Unemployment over the 2020-2022 period.

There is no need for a meeting of the NBER Committee and its definition of a recession as “a significant decline in economic activity” to conclude that the US economy has already entered into a recession. The second estimate published by the BEA today for the first quarter of 2020 is only slightly revised down at -5% from the first estimate published a month ago which showed that the US economy contracted by -4.8% in Q1 2020 over Q4 2019 on an annualised basis. Analysts are now focused on second quarter figures which are likely to show the full impact of the lock-down and the business shutdown imposed in April.

Almost one year before the outbreak of the coronavirus crisis the inversion of the yield curve, in May 2019, had already indicated that the US economy would enter into a recession within a few months. Here is what Chuck Jones, a senior contributor to Forbes wrote in December 2019.

Probably because the Fed has become more accommodative, investors seem to have come down with amnesia that there is a lag between the inversion of the yield curve and the start of a recession. If history is repeated a recession could start between January and November 2020.

In order to quantify the outlook for the quarters to come, taking into account the prevailing level of high sanitary and economic uncertainty, we estimate over the 1990-2020 period an econometric combining quarterly GDP with the monthly unemployment rate and the monthly average for the VIX equity volatility index. There is a well-documented robust economic relationship between GDP and unemployment (cf. the Ökun law). In addition, the impact of financial volatility and stress as a predictor of current and near-term GDP growth has been well documented by different authors as of late. One of the most interesting recent papers on this subject has been published in April 2019 by Tobias Adrian et al. under the title “Vulnerable Growth”. This sparse econometric model is primarily intended for nowcasting GDP growth over the next quarter, taking into account higher frequency data for unemployment and financial volatility.


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