A Macroeconomic News Index for Constructing Nowcasts of U.S. Real Gross Domestic Product Growth

Abstract

nalyzing the performance of the economy in real time is a challenge for those who must forecast important macroeconomic variables such as inflation or employment. A key aspect of this challenge is evaluating the incoming flow of information contained in economic announcements. Thus, if important economic data are stronger than forecasters and financial market participants expected, this information could be a signal to economic policymakers and others that the economy is strengthening. The opposite is true as well. This news signal is often called the unexpected, or "surprise," component of economic information flows (announcements). Many central banks and private forecasters have used these economic announcements to develop methods for forecasting the current-quarter's real gross domestic product (GDP) growth. Because these processes track the evolution of the economy's performance in real time ("now"), they are sometimes called "nowcasts" or "tracking forecasts." There are several types of nowcast methodologies. 1 For instance, some economists and economic consulting firms use a GDP accounting approach based on key data releases such as Census Bureau reports on retail sales or construction spending. Many of these reports provide the underlying data-known as "source data"-used by the Bureau of Economic Analysis (BEA) to compile Analyzing the performance of the economy in real time is a challenge for those who must forecast macroeconomic variables such as inflation or employment. A key aspect of this challenge is evaluating the incoming flow of information contained in economic announcements. In this article, the authors develop a simple-to-read index of these announcements that they then use to construct nowcasts. The index tracks whether key economic data have come in stronger, weaker, or as expected during the current quarter relative to a baseline consensus forecast. Specifically, the data releases are weighted relative to their importance in updating forecasts of real gross domestic product growth during the current quarter. (JEL C22, C53, E37)