The Unexpectedly Index

posted at 1:12 pm on August 30, 2011 by Karl
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ZeroHedge’s “Tyler Durden” understandably led with the depressing news that year-over-year real GDP growth now stands at 1.5%. Apparently, since 1948, every time YoY real GDP has fallen below 2%, the economy has fallen into recession. Manufacturing is likely to look bad on Friday, too.

But the amusing-if-it-wasn’t-sad part of Durden’s report is an apparently unprecedented deterioration in global growth based on a proprietary realtime model I would rename the “Unexpectedly Index”:
Few pictures sum up this collapse in output better than the chart below which plots the three month change in the “Global Surprise Model” (GSM). I created the GSM in the late 1990’s as a means of tracking how the most important (as measured by timeliness and market response) economic statistics were being reported relative to estimates. Although Goldman, and later Citigroup, created comparable models in the early 2000’s, it remains a very useful tool for tracking the change in economic growth (2nd derivative) relative to consensus forecasts.

As shown, the current three month change is the largest in the history of the model. In other words, the collapse in real-time economic data (such as ISM, German IFO, etc.) over the past three months is the sharpest of the last two decades for which data is available.
The accompanying chart at the link is not pretty. I suppose the silver lining is learning Goldman and Citigroup take note of how badly their government-style economic forecasting models fail. Admitting you have a problem is always the first step. It is at least a step ahead of the Obama administration and the establishment media. The establishment media seems more wedded to the idea of reporting “unexpectedly” bad economic news without ever reporting on the limits of macroeconomics as a science. That phenomenon is probably related to the cult of experts to which most of the media and the Obama administration belong. What results is a virtuous circle for progressives and a vicious cycle for everyone else. To quote Arnold Kling:
[E]lected officials want results. They turn to experts who promise results. The experts cannot deliver. So the experts must ask for more power.