Tags: Lazear | stock | GDP | indicator

Top Bush Economist Lazear: Stock Market a Better Economic Indicator Than GDP Is

By    |   Thursday, 01 August 2013 08:22 AM

While financial markets were encouraged by the 1.7 percent second-quarter gross domestic product (GDP) gain reported Wednesday, the stock market provides a better indicator of where the economy is headed, says Edward Lazear, chairman of President George W. Bush's Council of Economic Advisers.

"Unfortunately, there is very little predictive power in the quarterly release of GDP figures — whether they be the advance, preliminary or final — for economic growth over the subsequent year," he writes in The Wall Street Journal.

"Past GDP growth is not a good predictor of future GDP growth, in part because there is a significant amount of measurement error in the numbers that are reported during the first few months," Lazear explains.

Editor's Note:
 
The Truth About the Economy — Government Documents Lead to Eerie Conclusion

"The revised numbers that come out much later are better at predicting future GDP, but by the time they're out, the future has already passed in most cases."

Therefore, he says, "The market is a better and timelier forecaster of future GDP, perhaps because the market has a financial stake in getting it right."

According to his analysis, knowing how the current quarter's GDP growth rate stacks up compared with its historic average predicts correctly how next year's GDP growth rate will compare with its historic average only 61 percent of the time, notes Lazear, now an economist at Stanford University.

Meanwhile, the performance of the Standard & Poor's 500 compared with its average predicts the performance of the economy over the next year compared with its average 75 percent of the time, he says.

Still, many economists are making predictions in the wake of the second-quarter GDP report.

"The outlook for the second half is that growth gets stronger as the fiscal drag fades," Harm Bandholz, chief U.S. economist at UniCredit Group, tells Bloomberg.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

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Economy
While financial markets were encouraged by the 1.7 percent second-quarter gross domestic product (GDP) gain reported Wednesday, the stock market provides a better indicator of where the economy is headed, says Edward Lazear, chairman of President George W. Bush's Council of Economic Advisers.
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2013-22-01
Thursday, 01 August 2013 08:22 AM
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