Yesterday’s entry 1 was entitled “Possible end of the slowdown in industrial production ahead”. It was released slightly ahead of the January INDPRO number which, according to the Board of Governors , “increased 0.9 percent in January after decreasing 0.7 percent in December”. Neat forecast! Or was it by chance? Let me try to put that event into a broader forecast/nowcast context.
1 Nowcast vs. Forecast
Our system of INDPRO-indicators targets the current trend component:
- It does not explicitly address the future; it addresses the present
- It does not explicitly address INDPRO
- Instead it addresses current trend growth of (log-transformed) INDPRO: it is a nowcast
- Since it is a daily system, it addresses today’s trend growth or, to be more exact, the best estimate of growth given data up to today, whereby `today’ means: close time of S&P500 (I retrieve the data from Quandl and generate indicators at 12:00 local time (Switzerland) the following day).
2 Indicator System
There are four indicators: design 1 is lagging, designs 2 and 3 are coincident and design 4 is leading. The interplay of all four indicators is indicative for breaks or tuning-points: gaps between lagging, coincident and leading designs tend to narrow and crossings may occur at or before turning points, see 1.
In consideration of the fact that
- nowcasts do not explicitly target `future INDPRO releases’ and that
- interpretation of the indicator system is mostly a subjective exercise
it should be clear that yesterday’s conclusive `forecast’ exercise reported in the introduction of this blogpost is subject to caution, even more so if one checks the retrospective analysis by the Board of Governors (our indicators do not account for storms or for “unseasonably warm weather”, for example). My point at this stage is: it seems that the daily indicator system is able to retrieve meaningful information from data that seems to have some explanatory power for inferring INDPRO-growth between consecutive release time points. Looking forward to the up-dated indicator system (12:00 local time today).