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Weekly Update Two Arrows
by Nobel Laureate Lawrence R. Klein
and Professor Suleyman Ozmucur		  
 

There were encouraging reports, contributing to more optimism for economic expansion and low inflation, but not all the new indicators were on the side of good growth for the overall economy, and that is the way equity markets seem to have interpreted recent events.		  
 

Industrial production turned up impressively from a decline in March to a tidy gain in April.		  
 

In the weak market for residential investment, housing starts rose from March to April, but building permits fell sharply in the same period.		  
 

The Index of leading economic indicators declined in April, but only after having been revised upward for March. Also, initial claims for unemployment insurance fell in the week ending May 12.		  
 

Three surveys reported gains for early May. The University of Michigan advance survey of consumer sentiment was higher than in April. Also, the Empire State Survey of investment and the Philly Fed Survey reported spring gains.		  
 

Prices for both crude oil and gasoline are high and rising, and many analysts are voicing opinions that consumers are willing to go along with the costs and are not cutting their driving or other budgetary outlays. This is a very dubious assessment.		  
 

Our yield spread index readings for 10-year treasuries (regular issues versus tips) have been falling slightly.		  
 

In foreign exchange markets, the Canadian dollar has surpassed the 90 cents (US) line, but other strategic currency rates have stopped (temporarily, we believe) their appreciation versus the US dollar.		  
 

Personal saving rates remained negative, and it appears that China is allowing some additional appreciation of the Chinese currency versus the US dollar.		  
 
Real GDP Growth
Consumption Price Inflation		  
 
Current Quarter Forecasts
In the second quarter, real GDP is expected to increase 1.7% (SAAR), to be followed by 1.4% growth in the third quarter.

The GDP deflator is projected to increase 2.9% in the second quarter (SAAR), and 2.5% in the third quarter.

Nominal GDP is forecasted to total US$13.8 trillion in the second quarter, to be followed by US$14.0 trillion in the third quarter. This amounts to 5.3% (SAAR) expansion in the second quarter and 4.7% increase in the third quarter.

At the University of Pennsylvania, in cooperation with The WEFA Group, we have established statistical relationships between some 75 monthly economic and financial indicators and the main entries in the quarterly national income and product accounts (NIPA). This is a purely econometric system with no personal data adjustment. We update, on a weekly basis, partial information on the United States economy from high-frequency indicators, as they become available, and revise our current (and next) quarter forecasts, on a forward rolling basis.

In addition to economic forecasting at high-frequency intervals, our Current Quarter Model features the combination of GDP forecasts from three approaches — from bridge equations of both the product (expenditure) side and the income side of the NIPA, and from regressions of GDP on the principal components of selected major indicators.