1. F EDERAL R ESERVE B ANK OF P HILADELPHIA Real-Time Data at the Federal Reserve Bank of Philadelphia 2008 World Congress on National Accounts and Economic Performance Measures for Nations Washington, DC May 13 – 17, 2008 Tom Stark Federal Reserve Bank of Philadelphia

2. Real Time? History: Observations on economic variables, measured prior to revisionHistory: Observations on economic variables, measured prior to revision –Philadelphia Fed real-time data set Forecasts: Projections based on real- time historyForecasts: Projections based on real- time history –Philadelphia Fed forecast surveys

3. Overview of Talk Real-Time Data Sets at the Philadelphia FRBReal-Time Data Sets at the Philadelphia FRB –Forecast Surveys –Realizations

4. Overview of Talk Real-Time Data Sets at the Philadelphia FRBReal-Time Data Sets at the Philadelphia FRB –Forecast Surveys –Realizations Uses of Real-Time Data at the Philadelphia FRBUses of Real-Time Data at the Philadelphia FRB –Analyzing revisions –Evaluating forecast surveys –Testing the forecast implications of macroeconomic theories –Carrying out historical policy analysis

5. Overview of Talk Real-Time Data Sets at the Philadelphia FRBReal-Time Data Sets at the Philadelphia FRB –Forecast Surveys –Realizations Uses of Real-Time Data at the Philadelphia FRBUses of Real-Time Data at the Philadelphia FRB –Analyzing revisions –Evaluating forecast surveys –Testing the forecast implications of macroeconomic theories –Carrying out historical policy analysis Some ExamplesSome Examples –Revisions to the U.S. personal saving rate –Forecast accuracy in the Survey of Professional Forecasters –Using the PIH to forecast income in real time –FOMC’s response to inflation expectations

6. Real-Time Forecasts Livingston SurveyLivingston Survey –Semiannual: June 1946 to present –Focus on business indicators - Most popular: CPI Survey of Professional ForecastersSurvey of Professional Forecasters –Quarterly: 1968 Q4 to present –Focus on U.S. national accounts – Product side Greenbook Forecasts (Federal Reserve Board)Greenbook Forecasts (Federal Reserve Board) –Prior to each FOMC meeting, 1966 - present –PDF files provide wide range of variables forecast

7. Real-Time History: Philadelphia Fed Real-Time Data Set for Macroeconomists Started in early 1990s as a research project with Dean CroushoreStarted in early 1990s as a research project with Dean Croushore Provides snapshots of the data before revisionProvides snapshots of the data before revision Has since become an ongoing “Bank project” at the Philadelphia FRBHas since become an ongoing “Bank project” at the Philadelphia FRB

8. Real-Time History (cont.): Variables Included at the Phila. FRB NIPA Income and Product SideNIPA Income and Product Side Monetary AggregatesMonetary Aggregates Business Indicators (IP, Capacity Utilization, Housing Starts)Business Indicators (IP, Capacity Utilization, Housing Starts) Labor Market (Unemployment, Employment, Hours Worked)Labor Market (Unemployment, Employment, Hours Worked) Aggregate Price Indexes (GDP, CPI, PCE)Aggregate Price Indexes (GDP, CPI, PCE)

9. Uses of Real-Time Data at the Philadelphia FRB Analyzing RevisionsAnalyzing Revisions Evaluating Survey ForecastsEvaluating Survey Forecasts Testing TheoriesTesting Theories Conducting Historical Policy AnalysisConducting Historical Policy Analysis

10. (1) Revisions: U.S. Personal Saving Rate Nakamura and Stark (February 2007): Philadelphia Fed Working Paper No. 07-8Nakamura and Stark (February 2007): Philadelphia Fed Working Paper No. 07-8 Key Findings on Personal Saving Rate:Key Findings on Personal Saving Rate: –Early estimates very unreliable –Large upward revisions in benchmarks

11. U.S. Measured Personal Saving Rate (%) Large Upward Revisions 1965 to 2005 2005 Q3 Vintage Advance Estimates

12. U.S. Measured Personal Saving Rate: Distribution of Revisions Latest Available Minus Advance Estimate 1965 to 2005 U.S. Measured Personal Saving Rate: Distribution of Revisions Latest Available Minus Advance Estimate 1965 to 2005 Mean: 2.44 Std Dev: 1.88 MSE: 9.52

13. U.S. Measured Personal Saving Rate: Distribution of Revisions Last-before-Benchmark Minus Advance Estimate 1965 to 2005 Mean: 0.08 Std Dev: 1.06 MSE: 1.11

14. (2) Evaluation of Survey Forecasts: Survey of Professional Forecasters Two Key Issues Revised or unrevised realizationsRevised or unrevised realizations –Does it matter? –If so, how much? Information sets for estimating and forecasting benchmark modelsInformation sets for estimating and forecasting benchmark models

15. Revised or Unrevised Realizations? Nowcast RMSE Q/Q Real GDP Growth (Annual Rate, PPs.) Survey of Professional Forecasters, 1985-2005

16. Revised or Unrevised Realizations? Four-Quarter-Ahead RMSE Q/Q Real GDP Growth (Annual Rate, PPs.) Survey of Professional Forecasters, 1985-2005 Revised or Unrevised Realizations? Four-Quarter-Ahead RMSE Q/Q Real GDP Growth (Annual Rate, PPs.) Survey of Professional Forecasters, 1985-2005

17. Revised or Unrevised Realizations? Nowcast RMSE Q/Q GDP Inflation (Annual Rate, PPs.) Survey of Professional Forecasters, 1985-2005

18. Revised or Unrevised Realizations? Four-Quarter-Ahead RMSE Q/Q GDP Inflation (Annual Rate, PPs.) Survey of Professional Forecasters, 1985-2005

19. Benchmark Comparisons: Timing of Information Sets First Quarter Survey Forecasts for Q1,…,Q4,Q1 JanuaryFebruaryMarch NIPA Release for Q4 Questionnaire sent R-Time Data Set for NIPA Survey deadline January data: Labor market Interest rates Other January data: Retail Sales, CPI, PPI Housing Starts Industrial Production

20. Benchmark Comparisons: AR Models RMSE (SPF / AR), 1985 – 2005 Q/Q Real GDP Growth Measure of the Realization Initial 1-Qtr Later 1-Year Later 2-YearsLaterToday Nowcast0.820.890.890.870.91 4-QtrAhead0.990.970.960.981.01

21. Does The Relative Value of “Nowcast Information” Decline as Data Are Revised? RMSE (SPF / AR), 1985 – 2005 Q/Q Real GDP Growth Measure of the Realization Initial 1-Qtr Later 1-Year Later 2-YearsLaterToday Nowcast0.820.890.890.870.91 4-QtrAhead0.990.970.960.981.01

22. (3) Testing Economic Theories: Permanent Income Hypothesis (PIH) Nakamura and Stark (2007): Philadelphia Fed Working Paper 07-8Nakamura and Stark (2007): Philadelphia Fed Working Paper 07-8 Test Ireland’s Model of Forecasting with the PIH in Real TimeTest Ireland’s Model of Forecasting with the PIH in Real Time Key Findings:Key Findings: –Model works well when estimated on revised data… –…Not so good in real time

23. The Model and Methodology Estimate VAR in income growth and the saving rateEstimate VAR in income growth and the saving rate Impose restrictions implied by PIHImpose restrictions implied by PIH Run horse races between VAR-PIH and AR forecasts for income growth…Run horse races between VAR-PIH and AR forecasts for income growth… –…Using fully revised data –…Using data in hand in real time

24. Results: Forecasts for Income Growth RMSE (PIH/AR) Ratio 1971 to 1981 Revised Data 1-Step0.84 2-Step0.85 4-Step0.84 8-Step0.91

25. Results: Forecasts for Income Growth RMSE (PIH/AR) Ratio 1971 to 1981 Revised Data Real-Time Data 1-Step0.840.94 2-Step0.850.99 4-Step0.841.02 8-Step0.911.06

26. (4) Historical Policy Analysis: How Has the Fed Responded to a Rise in Inflation Expectations? Leduc, Sill, and Stark (2007): Journal of Monetary EconomicsLeduc, Sill, and Stark (2007): Journal of Monetary Economics How has the FOMC responded to expected inflation before and after 1979?How has the FOMC responded to expected inflation before and after 1979? Requires real-time measure of expectations for inflation: Livingston SurveyRequires real-time measure of expectations for inflation: Livingston Survey Findings: Strong response post-1979.Findings: Strong response post-1979.

27. The Model and Methodology VAR in actual and expected CPI inflation, unemployment, short-term interest rate, and commodity pricesVAR in actual and expected CPI inflation, unemployment, short-term interest rate, and commodity prices Real-Time Data: Expected inflation from Livingston SurveyReal-Time Data: Expected inflation from Livingston Survey Examine impulse responses to a one-time shock to expected inflationExamine impulse responses to a one-time shock to expected inflation Sample period cut at 1979Sample period cut at 1979

28. We Examine the Effect That a One Percentage Point Shock to (Livingston) Inflation Expectations…. Pre-1979 Post-1979 Effect of Shock on Expectations for Inflation

29. …Has on Inflation and the Real Rate Pre-1979 Post-1979 Inflation Real Rate

30. Concluding Remarks: Upcoming Changes May 2, 2008: INDUSTRY dummy variable added to micro data set for SPF forecastersMay 2, 2008: INDUSTRY dummy variable added to micro data set for SPF forecasters –Allows analysts to cut the data according to panelists employed in financial and nonfinancial sectors Summer 2008: New data-download pages for SPF and real-time data setsSummer 2008: New data-download pages for SPF and real-time data sets –Easier downloads for users Summer 2008: Forecast error statistics for (mostly) all variables in SPFSummer 2008: Forecast error statistics for (mostly) all variables in SPF Ongoing: New variables and more frequent vintages in real-time data set [joint with Dean Croushore]Ongoing: New variables and more frequent vintages in real-time data set [joint with Dean Croushore] –Monthly vintages for NIPA variables –Price indexes for PCE and core PCE –Detailed components from BEA’s personal income report

31. F EDERAL R ESERVE B ANK OF P HILADELPHIA Tom Stark Tom.Stark@phil.frb.org