Saturday, September 6, 2014


by Robert Lamy

At the start of each month, the U.S. Institute for Supply Management (ISM) released data on the state of the manufacturing and non-manufacturing industries of the U.S. economy. The data are closely followed by economists, stock market brokers, and the media as they provide the earliest reading on the current state of the economy. The ISM provides data on the current performance of a number of indicators related to the manufacturing and non-manufacturing industries, such as production, employment, new orders, and backlog of orders, deliveries, inventories, new exports, imports, and prices. Figure 1 plots the evolution since the first quarter of 1998 of a proprietary coincident economic index from The Forecasting Advisor, built from a number of indicators from both the survey on manufacturing and non-manufacturing industries, and U.S. real GDP growth.

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The aggregation of indicators from both surveys into a coincident economic index provides a close relationship with historical movements in real GDP growth. In other words, the Figure suggests that the coincident index contains useful information on the actual strength of economy. Because the ISM data are never revised, except for the annual updates of the seasonal adjustment factors, the coincident economic index is a useful real time forecasting tool and provides valuable leading information on ongoing changes in the pace of economic growth.

U.S. Real GDP Growth Outlook

The value of the coincident economic index for the month of July and August is used here to get a preliminary forecast of the rate of growth in U.S real GDP for the third quarter of 2014. The official first advance estimate of real GDP growth for the third quarter of 2014 will only be released on October 30th by the U.S. Bureau of Economic Analysis.

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The forecast for the third quarter of 2014 is reported in Figure 2. It shows an acceleration in the pace of economic growth in the third quarter, as real GDP is projected to rise by 5.3% (annual rate). In the second quarter, real GDP rebounded by 4.2% (preliminary estimate, annual rate) from the 2.1% drop in the first quarter. The projected stronger growth in real GDP in the third quarter reflects a significant strengthening in activity in both manufacturing and non-manufacturing industries.

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