I took a look at the NGDP growth forecast for 1Q 2017 to 1Q 2018 on Hypermind today, and it is showing 4.7%. Then I took a look at GDP data that is available from BEA and did a quick calculation of NGDP growth on a percentage basis from 4Q 2015 to 4Q 2016 and the same from 4Q 2016 to 4Q 2017. The former, growth in 2016, came in at 3.8% and for the latter 2017 it was 4.47%.
Then, since I really like working with the equation of exchange, I reused the idea of the split between P and Y, and went to the PCE inflation index so I could play with the numbers. If I assume M*V = P*Y like M*V = NGDP then the current PCE index should be able to tell me something about the first quarter NGDP forecast.
At first, before looking at the actual PCE data, I was somewhat charitable and assumed 1.8% yoy through February. I wasn’t too far off the mark as the trimmed mean is showing 1.7%. Assuming a 50/50 split between P and Y for NGDP, I multiplied 1.8% x2 came up with 3.6% annualized NGDP growth from 1Q 2017 to 1Q 2018, which is more than a full percentage point difference from the Hypermind forecast. If I take the PCE core data which is at 1.59% through February, it gets even worse with 3.12%. Both of these don’t really match the simple yoy 4Q to 4Q NGDP growth calculation I did for 2017, so I am not very confident in it. But given the circumstances of additional volatility in markets that began in early February, it may make some sense.
Then it hit me that what I really need is the GDP deflator, which poses a bit of a problem because it is only available through 4Q 2017, and if it means anything, the last data point is 1.85%. It’s close to my original guess of 1.8% for PCE, which is lucky for me.
In order to check my math, coming up with 4.47% NGDP growth for 4Q 2016 to 4Q 2017, and the GDP deflator for 2017 was 1.85%, then RGDP for 2017 should have been around 2.62%. Checking it against Fred, RGDP for 2017 was 2.9, which is 28 basis points difference from my calculation or 9% deviation. Not perfect, but not so far off as to be really bad.
So as far as back of the envelope calculations go, I’d say that the Hypermind forecast is on the optimistic side and I think that annualized NGDP growth for 1Q 2017-1Q 2018 will be closer to 3.9% given that the earlier calculation I did had a 9% devation.
If I am closer to the number than the forecast, it would be a real disappointing downshift from the 4.47% NGDP growth we got in all of 2017. But the market monetarist school of thought has certain advantages in this area, and it isn’t like we couldn’t have seen it coming knowing that we have a growth-rate inflation targeting central bank that would predictably offset possible positive supply shocks with the soft NGDP cap it uses to keep P in line.
Remember that PB&J sandwich metaphor I’ve been talking about lately? Well, it looks like the Fed has been busily squishing out more of the PB&J lately.