Consumer confidence vs. GDP growth

The highest correlation that can be found between consumer confidence and GDP growth... is not that high (about 0.5):

This makes consumer confidence one of the less-reliable leading indicators of the economy.

U.S. GDP Forecast update

Here are my latest forecasts. As a reminder, my model uses only cold hard statistical data. There are no assumptions made here, except for the one that past relationships between leading indicators of the economy and GDP will continue to hold.

One-time unexpected short-term fiscal effects, such as the Cash for Clunkers program, may thus not be captured, and I won't try to make up for it by artificially boosting my model's forecasts. The public demand component is accounted for through other variables, and I do expect my model to capture most of it over the medium-run.

GDP Forecasts:

Next 12 months: 1.5% growth
Q4 2009: 1.1%
Q1 2010: 0.8%
Q2 2010: 1.0%
Q3 2010: -1.3%
Q4 2010: -2.1% (as always, this last one is to be taken with a grain of salt as my model is not made to make forecasts more than 12 months out).

Below is a graph of my monthly GDP forecasts (annualized), along with the 50%, 75% and 90% confidence bands (click to enlarge):

Leading Economic Indicators Index increases again

I am a big fan of the Leading Economic Indicators, however I like much less the Index of Leading Indicators. The reason is because of the way it is constructed: the weights of each component are designed to smooth out the index (precisely, each one of the weights is calculated as the inverse of the component's volatility). As such, the weights don't reflect the predictive power of the indicators, nor their lead length relationship with the economy.

Secondly, the weights are recalculated each year and the components themselves have changed about once a decade.This invalidates historical comparisons.

Still, I prefer to see a rising Index rather than a falling one (click to enlarge):

Building permits and U.S. GDP growth

The highest correlation that can be found between building permits and subsequent year-over-year GDP growth is 0.64:

(Note: This is a 15-months rate of change, and Building Permits are advanced 6 months.)

This illustrates one of the missing private demand leg in this recovery.