N owcasting, or measuring the economy in real-time, is becoming an increasingly popular approach among economists and market practitioners. Here the term “nowcasting” is used to refer to the process of estimating the current state of the underlying driving factor that is by its nature unobservable at high frequency. SquareMacro methodology broadly relates to the literature on measuring the state of the economy in a time-series setting based only on fundamental economic data, however SquareMacro’s Real-Time Macro Factors (RTMF) retain a set of distinctive features embedded in our unique approach.
General Approaches to Nowcasting
There are two general approaches to track the economy in real-time:
1The first approach is to use a balanced panel regression, along the lines of the seminal paper of Stock and Watson (1989). The purpose of this first approach is to construct a coincident index of economic activity using factor models on a large set of macroeconomic releases, which basically amounts to constructing a weighted average of several monthly or quarterly indicators. The advantage of this technique is that the resulting index is based on many macroeconomic variables. However, this advantage also results in a relatively low measurement frequency, because the econometrician must wait for the panel to be complete before the index can be constructed.
2 The second approach is to model macroeconomic data using a state-space model (e.g., Evans, 2005). The advantage of this second approach is to produce an indicator at a higher frequency, since a state-space model can effectively handle the sparse and delayed reporting of economic data and missing information on non-release days. However, this technique is impractical for large cross-sections of macroeconomic releases.
Our methodology broadly relates to the academic literature commonly referred to as “nowcasting”, however our real-time indicators retain a set of distinctive features embedded in our unique approach.
SquareMacro Approach
SquareMacro’s Real-Time Macro Factors (RTMF) are designed to measure the state of the economy with a methodology that broadly retains the advantages of both approaches described above without their respective limitations. Specifically, we consider a large universe of macroeconomic announcements (this universe is unlimited by any size). This is a crucial aspect of our methodology, given the evidence of many influential releases from the macroeconomic announcement literature. At the same time, our approach can handle data released at different frequencies and missing observations to produce a real-time high-frequency measurement of the state of the economy.
Unique Features of SquareMacro Methodology
Our straightforward and data-driven method delivers a real-time, high-frequency, unbiased and objective reading of the state of the economy. Our methodology has several differentiating features relative to existing approaches:
I. LETTING THE DATA SPEAK FOR THEMSELVES
II. SYSTEMATIC INTEGRATION OF ALTERNATIVE AND TRADITIONAL DATA
III. OUR DATA ARE TRULY CAPTURED AND PROCESSED IN REAL-TIME
IV. WE ONLY PROCESS OBJECTIVE MEASUREMENTS OF THE ECONOMY