Once again an ISM spike was mostly taken back. The ISM spike on February 1 was taken back the next day.
From Pat Higgins, creator of GDPNow, on today's forecast.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2018 is 2.8 percent on March 7, down from 3.5 percent on March 1. The nowcasts of first-quarter real consumer spending growth and first-quarter real nonresidential equipment investment growth declined from 2.9 percent and 10.1 percent, respectively, to 2.6 percent and 6.9 percent, respectively, after the light vehicle sales release from the U.S. Bureau of Economic Analysis on March 2. The nowcast of the contribution of net exports to first-quarter real GDP growth declined from -0.43 percentage points to -0.59 percentage points after this morning's international trade release from the U.S. Census Bureau.
I exchanged emails with Pat Higgins late last week and on Monday this week and wrote about it yesterday in GDPNow-ISM Dynamics: Email Discussion With Pat Higgins.
The discussion centered around dynamic factors for ISM. Here is a chart of actual vs. theoretical had GDPNow not increased the dynamic factors for March 1.
PCE Estimates With and Without ISM Factor Changes
The final estimate is a bit more complex than just changing the factors. Yet one can see that had it not been for a change in the factors, there would not have been another ISM spike.
I asked Higgins "Is there some justification to do use the factors from Feb 27?"
He responded: The justification is that the factor values in the February 27th file do not incorporate the data in the March 1 ISM release, or any of the other released February data like Consumer Sentiment, while the factor values in the March 1 file at https://www.frbatlanta.org/-/media/documents/cqer/researchcq/gdpnow/GDPTrackingModelDataAndForecasts.xlsx do incorporate the February data. So you can get a sense of how the ISM, and other February data, is influencing the estimates of the factor values."
ISM Discussion With Jim Bianco
I had lunch a couple weeks ago with Jim Bianco, head of Bianco research. He talked about survivor bias and how it has impacted ISM surveys.
Here is a brief synopsis:
- Since 2007, ISM membership has declined by about 33%. The companies that remain display a survivor bias. They made it through the great recession intact. And they tend to be more bullish.
- Jim mentioned a Fed study that came to the same conclusion. The regional manufacturing surveys all have the same flaw.
- Jim also mentioned that his firm gets polled in the ISM Nonmanufacturing survey. He has a handful of employees.
- His firm has the same weight in the survey as Walmart which may be hiring or firing thousands of employees. I have mentioned this idea before, but now I have a concrete example to provide.
ISM has not been a reliable indicator of anything for quite some time. All of the diffusion reports from the Fed regions suffer similar flaws.
It strongly appears that ISM is influencing the GDPNow model factors in a predictable and wrong way.
Mike "Mish" Shedlock