## Thursday, September 15, 2016

### Putting numbers on vigor (7: Developing GDP)

From Wednesday we have this:

 Graph #1: GDP to Household Debt since 2005, and Five Projections
We're looking at the ratio of GDP to household debt, a ratio that goes down except in abnormal circumstances. I should toss out not only the polynomial projection that goes crazy high but also the two projections that run flat.

I won't toss anything yet.

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The graph shows GDP divided by debt. If I take those numbers and multiply them by the debt (household debt) I get GDP. Five projections of GDP out to 2025. These are predictions of a general trend. They do not predict recessions, which are disturbances to the general trend.

I'll take household debt and projections from Tuesday's spreadsheet. For now I'll just use the baseline estimate, the red line between the green and gold. Multiply Wednesday's data by Tuesday's, and we get estimates of GDP.

 Graph #2: GDP and Projections to 2025
Yeah, I'm getting rid of the "Poly" projection, the tall one.

 Graph #3: GDP and Projections (Red Poly omitted)
I should keep only the lower of the two remaining projections shown. Actually four remain, but there is some overlap, so only two are visible. I should keep the lowest one. In this series of posts, my argument is that GDP is going to go high. (My evidence is what's happening to Debt Service, which we talked about some days back.) I should keep the lowest one so that, when debt goes high, it isn't because I picked a high projection. We'll get to that.

In the legend, the projections are all called red. "Red" is a reference to the color of the baseline estimate on Tuesday's graph #1. The middle projection, based on the 2010-2016 numbers for household debt.

Right now I want to look at "percent change from year ago" numbers for GDP:

 Graph #4: GDP and Projections (Percent Change from Year Ago)
Yeah, I'll just keep the one projection, the lowest one. Linear, called "Red Lin", actually the green line.

Once again, the projections are smooth while the blue line is jiggy. I'm thinking, to make them comparable I should show the Hodrick-Prescott for the whole thing. So: Keep the low projection, add a Hodrick-Prescott, and make the historical data faint.

 Graph #5: GDP with the Lowest Projection, and the H-P Trend
Now we're getting there. The jiggies run higher than the trend, which made the low projection unimpressive on Graph #4. But as #5 shows, the uptrend will be quite impressive.

To refresh your memory, this estimate of future GDP is based on present trends in household debt service, household debt, and the ratio of GDP to household debt.

// the Excel file