Q2 GDP Better than Expected, Forecast Update

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The 2nd quarter GDP was released late last week. It showed a better than expected growth (although still negative) in Q2 of -1% vs. the economist polled -1.5%. The 1st quarter of 2009 GDP was revised downward to -6.4% from -6.1%.

How did this compare to my ARIMA based GDP forecast I issued a few months ago? It was also better than my forecasted Q2 (my forecast was -2.9%). Here is a plot showing my forecast from Q1 going forward along with the updated data:


So you can see the actual data was above the expected (the first blue square) but still fairly close considering the width of the confidence intervals. This is not bad for an economics ignorant purely mathematical ARIMA model. As I mentioned when I first did this ARIMA model a few months ago, I would not look at this forecast as a precise model but rather what to expect in general for the general shape of the recovery. That still seems to hold here.

How Much Does the Q2 Data Change the ARIMA Forecast?

One important concept when it comes to a forecasting model is what I call the continuity of the model. In this respect here, what I am interested in is how stable the model forecast is as new data becomes available. You would not like a model that shows poor continuity from one forecast period to the next as a new data point becomes available. You would like the forecast to slowly evolve over time as new data becomes available. Shown below is the forecast model from Q1 along with the updated ARIMA model including the revision to Q1 and the new Q2 data point.


Notice how the forecast from Q2 (in green) shifts upward only slightly compared to the forecast from Q1(in red). But there is not a dramatic change in the expectation going forward. The general trend and shape going forward is consistent. Both forecast the GDP to go upward and be positive next year.

Final Thoughts and Expectations

One thing to keep in mind is that the Q2 GDP will be revised in the future as new information becomes available and in this case, it would not surprise me if it was revised downward as Q1 was and that may change the perspective going forward some. But either way, according to this ARIMA model it looks like we can expect the GDP to be positive again probably the end of this year or the beginning of next year.

Also keep in mind that GDP has a lot of variability quarter to quarter so it is entirely possible that next quarter's GDP might be lower than this quarter which would not mean the recovery is on hold, only that the noise in the number may be going the other way (where in Q2 we may have benefited from some positive noise).

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