Usually, forecasts by members of the Federal Reserve and its statistical departments have to be taken with a grain of salt.
Former chairman of the Federal Reserve Ben Bernanke became infamous for denying the housing bubble and subsequent crash. Nobody at the Fed predicted a meltdown in financial markets in the wake of the Lehman crisis either.
In December, the Federal Open Market Committee (FOMC) thought GDP growth would be around 2.6 to 3.0 percent in 2015. It revised these projections down to 2.3 to 2.7 percent just before first quarter GDP came in at a shockingly low 0.2 percent.
However, there is one regional Federal Reserve Bank which was spot on predicting first quarter GDP and paints a dire picture for the second quarter: The Atlanta Fed.
Only a week after the FOMC revised its expectations (actually using the model as an input) and one full month ahead of the official data release, it accurately predicted growth of only 0.2 percent, far below of Wall Street Consensus (just below 3.0 at the time).
This time, it’s not much different. The Bureau of Economic Analysis (BEA) will release the first estimate of second quarter GDP on July 30. Wall Street still expects growth to come in at around 3 percent. The Atlanta Fed says it’s only going to be 0.7 percent.
The model reaches its highest accuracy around a month before the official release, when it’s only off between 1.1 and 1.2 percent.
As to why it is so accurate, the Atlanta Fed shrouds itself in incomprehensible statistician English:
“The Atlanta Fed GDPNow model also mimics the methods used by the BEA to estimate real GDP growth. The GDPNow forecast is constructed by aggregating statistical model forecasts of 13 subcomponents that comprise GDP,” it states.
Translated this means that the model incorporates the same factors the BEA uses when calculating its GDP, only in real time. That’s good news, if only the forecast was for the second quarter was better.