Friday, November 8, 2019

Wage growth and belated GDP updates

Wage growth data from the Atlanta Fed came out yesterday and the dynamic information equilibrium model (DIEM) has been doing fairly well for awhile — coming up on two years in a couple months!

J.W. Mason will have to continue to be puzzled. Black is post-forecast data, and click to enlarge. We can also say the DIEM forecast was better than Jan Hatzius' (Goldman Sachs) forecast from this same week one year ago. Orange is the actual average over that time period with one standard deviation errors, compared with Hatzius' range in purple:

Other forecasts where the DIEM is outperforming are RGDP growth and PCE inflation (those belated GDP updates). These cases aren't so much about the center of the prediction, but rather the error band being smaller for the DIEM model and still being accurate.

There's also the FOMC forecast, which is fine but claims a lot more precision in their "central tendency" that must be reflecting something other than RMS error [1]:

And here's the forecast of nominal GDP (NGDP) over employment (PAYEMS or here L) that forms the basis of (the information equilibrium view of) Okun's law and the "quantity theory of labor":



[1] A "central tendency" in the opinions of a group of people is sometimes called "groupthink".

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