Goldman: Forget (Plunging) GDP As A Tracker Of US Growth, Meet Goldman's Current Activity Indicator (TM)

Tyler Durden's picture

When data don't go your way, just change the rules, move the limits, or, best of all, introduce brand new data that will validate your assumptions. This has been demonstrated very well in Fukushima over the past month. Now it is coming out from Goldman's economic team, which is finding GDP to not be quite as amenable to "presenting" for client indoctrination purposes, due to its recent plunge from expectations (especially those of young master Hatzius, discussed here). As a result the Hatzius et al team have decided to launch an experiment in scrapping GDP as the key indicator of economic growth (or lack thereof) for those periods in which it is dropping, and instead will focus on the CAI, or the Current Activity Indicator: a synthetic Made In Goldman bogus indicator, which ignores the weak data, and emphasizes the good stuff. Brilliant. Goldman's recent addition to its economic team Zach Pandl explains. Elsewhere, Zero Hedge is launching a contest for the best abuse of the CAI acronym to explain what it really means...

CAI: A Measure for Tracking US Growth

GDP is the most common summary measure of activity, but it has several flaws. Most importantly, it excludes many important indicators (e.g. industrial production, ISM, payroll employment) and is not very timely. Alternative summary measures may be more valuable from a market perspective.

With this in mind, we have created a Current Activity Indicator (CAI), and find that it complements our other tools. In statistical jargon, the measure is defined as the “first principal component” of 24 real activity indicators, expressed in GDP-equivalent terms.

At present, the current activity measure carries a clear message: US growth likely had considerable momentum in late Q1. According to the CAI approach, the positive signal from the business surveys and from a few of the other “hard” indicators (e.g. hours worked) dominates negative news from expenditure-related data—consistent with our forecast that GDP growth will accelerate again in the second quarter.

Gross Domestic Product (GDP) is the most widely used summary measure of economic activity. GDP underpins governments’ budgets and provides the structure for most macroeconometric models. Data watchers spend considerable effort “tracking” its progress through time. But GDP has some serious flaws: it is only available quarterly and released at least a month after activity took place; initial estimates are based on incomplete data and therefore heavily revised; it is based primarily on expenditure figures even though other series, such as income-related data, may provide more reliable estimates; and “noise” in a few components, like trade and inventories, can have a large affect on short-term trends.

Given these drawbacks, other summary measures of current activity may be useful as well, particularly from a market perspective. With this in mind, we have created a US Current Activity Indicator (CAI), and find that it complements our existing tools.

We construct the CAI in three steps:

1. Model high-frequency indicators. Summary measures of economic activity are usually only available with a long lag. Because they incorporate data from many different sources, they are only as timely as the slowest indicator. For example, a proper measure of monthly GDP can only be calculated 6-7 weeks after the end of the month when the Census Bureau releases data on retail inventories. However, while we sometimes lack actual values for certain indicators, we always have expectations for those variables based on current information. Before the release of nonfarm payrolls, weekly jobless claims reports provide a rough sense of labor market conditions. Daily gas price data inform our views on the CPI, and chain-store results our expectation for retail sales. Our assessment of current conditions becomes less uncertain with the release of additional data, but even before that we are not completely in the dark.

We exploit this simple idea for our CAI. As a first step, we model the interrelationships between 24 weekly and monthly real activity indicators for the US economy. We then use this system to forecast each variable for periods when actual values are not yet available. The table below lists the indicators we include. There are three types: surveys, measures of real expenditures (which are used to calculate GDP), and other “hard” indicators. A few others (e.g. the Empire State index and gasoline prices) are included in the forecasting system but not in the final CAI.

2. Calculate common component. Variation in real activity indicators can be thought of as the sum of two parts: 1) a component common to all measures, which likely relates to the business cycle; and 2) an idiosyncratic component particular to each indicator. For example, both the ISM index and real disposable income vary over the business cycle, but only the latter is directly affected by changes in the tax code (at least over the short run). To capture this common trend, we calculate the first principal component of the 24 indicators. The first principal component is the time series that minimizes the proportion of the variation in the sample that is explained by idiosyncratic factors. The resulting principal component is a weighted average of the indicators expressed as normalized scores (i.e. with zero mean and unit standard deviation). Before complete data is available for all indicators, the principal component reflects a blend of actual values and model-based expectations.

3. Express in GDP-equivalent terms. GDP may have flaws, but it is still the way in which most people think about growth. In contrast, the units of our first principal component are not immediately intuitive. Therefore, as a final step, we express the first principal component in GDP-equivalent terms. The goal is not to forecast GDP – for which we think our “bean-count” modeling still works better – but to present the series in recognizable units. We first average the principal component into quarterly values and then regress it on real GDP growth and a constant (note that we use fully revised GDP growth, not originally reported/unrevised figures). We then apply the estimated coefficients to the monthly estimate of the first principal component. This final measure is our Current Activity Indicator: the first principal component of 24 indicators, expressed in GDP terms. The exhibit below shows the CAI along with quarterly GDP growth.

There is already a large literature on alternative summary measures of US activity. Our series is most akin to the Chicago Fed National Activity Indicator (CFNAI), originally developed by James Stock and Mark Watson (“Forecasting Inflation”, Journal of Monetary Economics, October 1999). The CFNAI is the first principal component of 85 real activity indicators related to production and output, the labor market, real expenditures and income, and business conditions. The simple correlation between the CFNAI and our measure is 92%. Differences include: 1) the specific indicators in the sample; 2) the fact that we express the series in GDP-equivalent terms; and 3) that we can calculate our indicator at any time. The CFNAI is published monthly around four weeks after the end of the reference month.

Other measures more loosely related to our CAI include the US Treasury’s Real-Time Forecasting System (RTFS) and the Arouba-Diebold-Scotti (ADS) Business Conditions Index published by the Philadelphia Fed (for RTFS, see “Real-Time Forecasting in Practice”, Business Economics, October 2003; for ADS, see “Real-Time Measure of Business Conditions”, Journal of Business and Economic Statistics, October 2009).

The CAI has a few notable statistical properties. First, it is dominated by surveys: the six component indicators with the largest weight are all surveys. Expenditure data and other “hard” indicators matter, but they are also influenced by more idiosyncratic factors – weather, worker strikes, tax law changes, seasonal adjustment distortions, etc. The typical “hard” indicator has about half the weight of the best of the surveys. In practice, this means that a one standard deviation change in a highly weighted survey indicator (e.g. the ISM) is worth about a two standard deviation change in a hard indicator (e.g. imports or consumer spending). Second, the CAI is a moderately better predictor of future GDP growth than current GDP, at least in-sample (at a one-quarter horizon, the regression standard error is 10% smaller). Academic research, such as the Stock and Watson paper cited above, has generally found favorable properties in principal component-based indicators (see also Ben Bernanke and Jean Boivin, “Monetary Policy in a Data-Rich Environment”, Journal of Monetary Economics, April 2003). Third, the CAI can be revised, both because its components are revised and, for the latest month, because we replace forecasted values with actual results as they are released.

At present, the current activity measure carries a clear message: US growth likely had considerable momentum in late Q1. Although our “bean-count” model of Q1 GDP suggests growth of 2.5% or lower, the CAI showed growth of 3.6% in February. For March the index is currently tracking growth of more than 4%, because available surveys remain strong and declines in other indicators (e.g. imports and housing starts) look likely to reverse. According to the CAI approach, the positive signal from the business surveys and from a few of the other “hard” indicators (e.g. hours worked) dominates negative news from expenditure-related data—consistent with our forecast that GDP growth will accelerate again in the second quarter.

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Spitzer's picture

Are they going to count interest on credit card debt in the "CAI" like they do for GDP ?

ghostfaceinvestah's picture

Good one, you clearly understand the components of GDP better than 99.9% of Americans.

My fav is the imputed rent homeowners pay themselves.

slaughterer's picture

Is THIS how they are going to save ES 1500 this year?

Dugald's picture

Rose tinted spectacle itis, the national malaise.

Awsome in its potential, frightening to those few Americans not involved in perpetual naval gazing......





Id fight Gandhi's picture

Obfuscation and theft go on. What do they need to fudge to get qe3? Because we can't have a selloff of the market, oh no.

TWORIVER's picture

Calling All Idiots

Misean's picture


+any amount of Benny Bucks you want. Fantastic, catches the mood and zeitgeist perfectly.

Robslob's picture

Enron Economy 101

Zero Govt's picture

a kick in the only place it hurts ..well done Belgium, with Iceland are we starting on a roll here?!!!

Hang The Fed's picture

Collection of Asinine Information.

Dick Darlington's picture

CAI = Cheating all idiots

Cleanclog's picture

Still love WTF - Winning the Future.  Argh!

TruthInSunshine's picture

Hey, maybe they can remove the companies that either don't grow profits and share price, and the companies that get sick or die, also, from the major indexes, in to order dramatically skew index performance to the upside... know, re-jigger the indexes to put lipstick on pigs.

Oh, wait.

They do that all the time.


My bad.


(Has anyone ever done a study of what index returns would have looked like if they re-manipulated indexes every decade or so instead of on a continual basis? I'd bet it would be horrendous)

Spalding_Smailes's picture

Or use this ..... 96.5, we are back to 2006 levels on the index.


The Ceridian-UCLA Pulse of Commerce Index™ (PCI), a real-time measure of the flow of goods to U.S. factories, retailers and consumers, rose 2.7% on a seasonally and workday adjusted basis in March, more than offsetting the 0.3% decline in January and the 1.5% decline in February. On a quarter over quarter basis, the PCI is up 3.9% at an annualized rate, a welcome acceleration from the relatively weak growth of the PCI experienced in the second half of 2010. Over time, the PCI has shown a substantial correlation with Industrial Production. Last month, the PCI correctly suggested Industrial Production for February would come in flat to slightly down at .02%. The strong March PCI suggests a 0.8% gain in industrial production for March when that data are released by the Federal Reserve on April 15.


“March represents the sixteenth consecutive month of year-over-year growth in the index,” explained Craig Manson, senior vice president and index expert for Ceridian. “This is particularly encouraging because the first six months of last year were strong, and the index posted solid growth despite the difficult year-over-year comparison. Continuation of this trend is welcome news, because like the overall economy, the PCI has been growing since it first turned positive in December of 2009.”

About Ceridian-UCLA Pulse of Commerce Index
The Ceridian-UCLA Pulse of Commerce Index™ is based on real-time diesel fuel consumption data for over the road trucking and serves as an indicator of the state and possible future direction of the U.S. economy. By tracking the volume and location of fuel being purchased, the index closely monitors the over the road movement of raw materials, goods-in-process and finished goods to U.S. factories, retailers and consumers. Working with economists at UCLA Anderson School of Management and Charles River Associates, Ceridian provides the index monthly and also offers companies access to more detailed fuel-use information. Ceridian is a global business services company providing electronic and stored value card payment services and human resources solutions. UCLA Anderson School of Management is perennially ranked among top-tier business schools in the world. Charles River Associates is a leading global consulting firm that offers economic, financial, and business management expertise to organizations around the world.

SDRII's picture

central agency intelligence

centerline's picture

Corruption aggregator index

Cleanclog's picture

Criminal Accusation Immunity

Crowd Activity Instigator

Cacophony Adjustment Invention

Crafty Asset Influence

Probably all of the above.

Piranhanoia's picture

Create Artificial Incentive

GolfHatesMe's picture

CAI stands for (C)We (A)Fuck (I) You, the CA and I are all silent

fbrothers's picture

Who is this for the buyer or the seller?

Vagabond's picture

Completely asinine index

mynhair's picture

Crap, you beat me to it.

Frigging captcha longer than 2 characters.

themosmitsos's picture

So, they just invented their own bullshit indicator to denote GDP at +4%?! Is this a joke?

tgatliff's picture

The thing I am confused is why they created another name?  I mean just change the way the GDP is calculated and say the new way is a "better indicator of growth" like they did with CPI.

Growth problem solved!!



Careless Whisper's picture

Did anyone at Goldman get served with a subpoena today?

assumptionblindness's picture




Aristophanes's picture

Don't worry, soon a massive uptick in the purchases of shotguns and pitchforks will raise the CAI for them.

Run you Goldman bastards!

SheepDog-One's picture

Now you need to upgrade from hip waders to chest wader boots to slog thru the economic BS dump daily.

Global Hunter's picture

"model high frequency indicators", sounds like they're just making stuff up now.

They're beginning to sound like special interest groups that use "empirical evidence" to shake the government down for money.  "7 out of 10 female university students don't feel good about their body image therefore we need a 25MM grant to study this further and provide them with effective services."

When the world becomes one big social science class the endgame is near.

centerline's picture

Too bad that GDP is based on hot money.  Therefore, everything downstream is bullshit.  Bummer.

Everybodys All American's picture

CAI - Cover Ass to Infinity

djb1953's picture

Crap Anal Intelligence

slaughterer's picture

Crappy Associative Idiocy

Zero Govt's picture

Criminal Assistence Index ....say everythings rosey while you rob/rape what's left of the economy

Everything is 'perception' to be 'managed' (manipulated) by fraudsters Goldman Sachs. AAA is actually shit, the ACI is another sugar coating for turds ..the frauds are at it again

alien-IQ's picture

According to Goldman, GDP should be measured exclusively by the number of $1000 per hour escorts buying a brand new Benz each quarter.

RobotTrader's picture

Another excuse to drive consumer discretionary stocks up even faster.

Sheesh, so many are going totally parabolic, its crazy.

SheepDog-One's picture

So is gold and silver. Immune from paper wildfire soon.

Internet Tough Guy's picture

Futures are skying! Sell gold, buy bank stocks!
RobotTrader - Fri, Apr 15, 2011 - 08:38 AM

LOL, I told all the anarchists at ZH last night, warning them of a rotation out of GLD and SLV into XLF......

FoieGras's picture

I've been hearing about plunging GDP since Q3 2009. Every quarter we will "really have the double dip now".

Sooner or later the GDP bears will be right, let's not forget they have been brutally wrong for so long now. Hilarious.

SheepDog-One's picture

'GDP bears'? Who gives a shit about GDP, that number is now as phony and data chery picked as anything Ponzi bears will be proven totaly right when the streets are suddenly running with blood. And who cares if youre right then?

adyaner's picture

Crap Asset Investment

OldPhart's picture

Can't Admit Inflation

Bam_Man's picture

Now that the economy has been totally converted to a hyper-leveraged Ponzi casino, GDP is irrelevant (if not practically non-existent).

Just keep track of the Russell 2000. No need to measure anything else.

centerline's picture

Casinos dont have windows or clocks for a reason.