March 21, 2024

Nowcasting GDP growth

The growth rate of GDP is an important indicator forecasted in the CPB’s semi-annual CEP and MEV projections. The GDP growth rate from the previous quarter is often not yet known when a forecasting round at the CPB begins, because this statistic is published with a delay. Therefore, we have developed a time series model that utilizes the available information published earlier and more frequently than GDP to accurately predict GDP growth for the previous quarter (backcast) and the current quarter (nowcast). From now on, the CPB will use the forecasts from this new model to support the standard forecasting procedure for GDP growth.

This publication discusses the time series model developed to forecast the GDP growth rate of the current quarter, also known as nowcasting. The developed model is a dynamic factor model (DFM) which is capable of incorporating the most up-to-date monthly and quarterly data. In this publication we compare the predictions of the DFM with those of the current CPB-BVAR and a naive forecast. The DFM provides the most accurate forecasts both for the shorter forecast horizon and for the full forecast horizon of up to four quarters ahead. We also develop a measure of the effect of an update of the data on the forecast of GDP growth. This measure can help forecasters to better understand and explain changes in the forecast over time.