GDP: Levels, Points and Forecast

As an economic release since 1990 and viewed over 25.3 years or 103 quarters, GDP ranges vary widely from lows at 2.7 to 4.7 highs but wide ranges are partly explained due to 6 consecutive negative quarters seen in the 2009 period. Previously, GDP was negative twice in the past 25 years and both quarters, 24 and 25 years ago or 96 and 97 quarters, were negative 0.1 and 0.2. To exclude 8 negative quarters in 25 years, GDP was positive every quarter and ranged from 0.2 – 4.8 highs. Further exclude 0.2 and 4.8 because 0.2 was seen twice and 4.8 once then the optimal 25 year range would become 0.8 – 4.5, a mid point of 3.7. Current 3.9 GDP was last seen 11.1 years ago or 45 quarters. The GDP path since 4.1 highs 11.1 years ago experienced a continuous drop and resulted in negative 2.6 and 2.8, seen 6 and 7 years ago or 24 and 26 quarters.

A current consensus forecast of 1.6 assumes every average from 1 – 25 years breaks lower. A 2.3 drop from 3.9 to 1.6 assumes GDP flies through to the lower bound range seen 7 and 8 quarters ago at 1.7 and 1.5. It assumes the 9 year average breaks at 1.98. Since the last negative 1.5 quarter 23 months ago, GDP remained above 2% in 12 of the last 22 quarters and below 10 quarters or 4.2 and 2.2 years.

In order for GDP to break lower, the 21 and 25 year averages and accompanying medians must break at 2.78 and 2.70. The range becomes caught between the 15 and 25 year averages from 2.70 – 2.27. A break of 2.27 then reveals ranges between the 5 and 3 year averages from 2.27 – 2.16. A break of 2.16 then ranges become 2.16 – 2.05 at the 3 and 6 year averages. Only a break of 2.05 contends with the 9 year average at 1.98.

GDP at 3.9 is overbought at the 3, 6 and 9 year averages but is just fine at the 15, 21 and 25 year averages. Longer averages reveal a trend underway while short averages inform a correction in the larger uptrend is warranted. Averages 3, 6 and 9 years also reveal maximum peaks at 4.12, 4.18 and 4.28 to offer context to overbought 3.9. Longer averages at 15, 21 and 25 peak at 5.08, 6.33 and 6.35, not likely to be seen anytime soon but to inform what a trend underway means.

What further informs a correction and / or lower GDP is the significant peaks seen at the 3, 6 and 9 year averages. Yet peaks could be derived from out of sync averages as the composition among averages lack uniformity.

GDP targets along the horizon begin at 3.97, 3.91, 3.21, 2.86, 2.74 and 2.71. What is seen from the data is a GDP quarterly correction but not a dip to the extent forecast. GDP appears to be trundling along way above the 2% point seen in 9 of the last 14 quarters. Over time and if forecasts hold, its USD positive and should be sufficient for a Yellen Fed Funds Hike.

Brian Twomey, Inside the Currency Market, btwomey.com

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