“Markets are telling where NGDP growth is heading” – an update

We´ll pretty soon have the first estimate of GDP for the first quarter of 2014. Coincidentally, a friend yesterday sent me an e-mail in which he mentioned a post by Lars Christensen from 2012 – “Markets are telling us where NGDP growth is heading”. In that post Lars writes:

To try to illustrate the connection between the markets and NGDP I have constructed a very simple index to track market expectations of future NGDP. I have only used two market indicators – a dollar index and the S&P500. I constructed an index based on these two indicators – I have looked at year over year percentage change in both indices. I have standardized the indices and deducted them from each other – remember higher S&P500 means higher NGDP, but a stronger dollar (a higher USD index) means lower NGDP. I call this index the NGDP Market Indicator.

My indicator is only a slight modification from the one Lars constructed. The chart below spans the period from 1990Q1 to 2014Q1 (NGDP is available to 2013Q4).

NGDP Indicator_1

The next chart shows only the more recent period. What the indicator appears to be telling us is that NGDP is likely to remain growing close to 4% (YoY).

NGDP Indicator_2

This is why the notion of a “Great Moderation 2.0” is being widely discussed. Unfortunately, people are discarding the level of NGDP too quickly and saying this is the “new normal” or “Great Stagnation”. But the “Great Moderation 1.0” was the combination of both a stable NGDP growth rate AND an appropriate level path along which it travelled. At the moment we have only the stable growth. The level path is clearly unsatisfactory; just look at the low employment level and way below target inflation.

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