Forecasts and Reality Clash
No one said it would be easy to forecast an economy emerging from a pandemic, especially after unprecedented fiscal stimulus and a steep interest rate hike campaign. Yet, Wall Street’s miscalculations on the U.S. economy in 2023 have been significant. From the beginning of the year to the end, and often in between, the predictions have been proven wrong time and again. Even after the full year had passed, Wall Street was still caught off guard by the release of the fourth-quarter GDP data, which demonstrated 3.3% growth, well surpassing the consensus of 2%. Surprisingly, the Federal Reserve’s policymakers were also way off the mark, but fortunately for them, they do not forecast quarterly data. They forecasted 0.5% growth for 2023, while the actual GDP rose by 2.5% last year.
The Role of Nowcasting and Atlanta Fed
To shed some light on these forecasting discrepancies, it is important to understand the concept of nowcasting. Nowcasting is a modeling technique that utilizes monthly economic data to predict the initial reading of GDP. The Atlanta Fed serves as a reliable source for the nowcast as it tracks the Wall Street consensus through publishing the Blue Chip economic consensus and the average of the highest and lowest forecasts.
First Quarter Surprises
Looking at the first quarter, reported GDP growth stood at 1.1%. In the beginning, Wall Street did not anticipate any growth during this period. However, as the quarter progressed, both Wall Street and the Atlanta Fed’s nowcast adjusted their predictions, and their consensus proved accurate. Notably, the first-quarter GDP growth was later revised upward significantly to 2.2%. Surprisingly, Wall Street initially expected no growth at all for this quarter.
The Third Quarter Jolt
Moving on to the third quarter, the initial reading of GDP stunned analysts with a remarkable 4.9% growth. Wall Street once again found itself taken aback by the numbers.
October-to-December Growth and Wall Street
Last but not least, Thursday’s report revealed a GDP growth rate of 3.3% for the October-to-December timeframe. However, Wall Street remained inadequately prepared for the actual figures, despite having a full quarter of economic data at their disposal. This discrepancy highlights the challenges of accurate economic forecasting, particularly during periods of uncertainty and rapid change.