Nowcasting is the prediction of the present, the very near future and the very recent past in economics. The term is a contraction of "now" and "forecasting" and has been used for a long time in meteorology. It has recently become popular in economics as standard measures used to assess the state of an economy, are only determined after a long delay, and are even then subject to subsequent revisions. Nowcasting models have been applied in many institutions, notably Central Banks, and the technique is used routinely to monitor the state of the economy in real time.
Principle
While weather forecasters know weather conditions today and only have to predict future weather, economists have to forecast the present and even the recent past. Historically, nowcasting techniques have been based on simplified heuristic approaches. A 2008 paper by Giannone, Reichlin and Small finds that the process of nowcasting can be formalized in a statistical model which produces predictions without the need for informal judgement. The model exploits information from a large quantity of data series at different frequencies and with different publication lags. The idea is that signals about the direction of change in GDP can be extracted from this large and heterogeneous set of information sources before GDP itself is published. In nowcasting this data is used to compute sequences of current quarter GDP estimates in relation to the real time flow of data releases.
Development
Selected academic research papers show how this technique has developed. Banbura, Giannone and Reichlin and Marta Banbura, Domenico Giannone, Michele Modugno & Lucrezia Reichlin provide surveys of the basic methods and more recent refinements. Nowcasting methods based on social media content have been developed to estimate hidden quantities such as the 'mood' of a population or the presence of a flu epidemic. A simple to implement regression-based approach to nowcasting involves mixed-data sampling or MIDAS regressions. Nowcasting can additionally be combined with econometric models to improve overall forecast accuracy and reduce errors. The Federal Reserve Bank of Atlanta publishes a nowcast for U.S. GDP called GDPNow.
