Forecasting U.S. Economic Growth in Downturns Using Cross-Country Data

Abstract

To examine whether including economic data on other countries could improve the forecast of U.S. GDP growth, we construct a large data set of 77 countries representing over 90 percent of global GDP. Our benchmark model is a dynamic factor model using U.S. data only, which we extend to include data from other countries. We show that using crosscountry data produces more accurate forecasts during the global financial crisis period. Based on the vintage data on August 6, 2020, our benchmark model forecasts U.S. real GDP growth in 2020Q3 to be-6.9% (year-over-year rate) or 14.9% (quarter-over-quarter annualized rate), whereas the forecast is revised upward to-6.1% (yoy) or 19.1% (qoq) when crosscountry data are used. These examples suggest that U.S. data may fail to capture the spillover effects of other countries in downturns. However, we show that foreign variables are much less useful in normal times.