An Economy Driven by Oil. Forecasting Key Provincial Economic Indicators Using a Time Series Approach

Transcription

1 An Economy Driven by Oil. Forecasting Key Provincial Economic Indicators Using a Time Series Approach Scott Lynch December 1, 2017 Funding Provided by the Vice President Academic s Support for Scholarship in the Arts at Memorial Program and The Collaborative Applied Research in Economics (CARE) Initiative

2 Forecasting Methods * Large Scale Causal Econometric Models -NALEM (370 mathematical equations and 600 data series) * Artificial Intelligence Methods -Neural networks * Judgmental Forecasting Methods Delphi Method * Time Series Methods Vector Auto Regressions (VAR) Noble Prize Winner 2011 Christopher Simms famous article Macroeconomics and Reality Econometrica, Vol 48, No. 1(January 1980), pp. 1-48

3 A Simple VAR Example

4 Oil Prices Oil Production Exogenous Endogenous GDP Retail Sales Employment Hours Worked Residential Unit Sales Hourly Wage Rate Average Housing Prices CPI

5 Oil Prices (Monthly Average) Brent USD: Actual and EIA Forecast January 1998 to December 2018 Source: US Energy InformaAon AdministraAon Jan-98 Jun-98 Nov-98 Apr-99 Sep-99 Feb-00 Jul-00 Dec-00 May-01 Oct-01 Mar-02 Aug-02 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 Jan-18 Jun-18 Nov-18 Brent USD

6 Oil Production NL Oil Produc-on (millb) January 1998 to December 2018 Source: C-NLOPB and Author's Calcula-ons Jan-98 Sep-98 May-99 Jan-00 Sep-00 May-01 Jan-02 Sep-02 May-03 Jan-04 Sep-04 May-05 Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Jan-18 Sep-18

7 Annual Produc,on (million bbls) Canada - Newfoundland and Labrador Offshore Area Hebron South White Rose North Produc,on Amethyst White Forecast Rose Terra Nova Hibernia Year Source: C-NLOPB

8 The Modeling Process * Step One: Update the data set and convert to year over growth rates * Step Two (a): Apply the Denton Method if needed * Step Two (b): Produce an estimate of GDP to complete the data set (choose optimal model based on lag structure criteria and check for stability) * Step Three: Produce a x step ahead dynamic forecast of the complete model (in this case x=15, 3 months remaining in 2017 and 12 for 2018) * Step Four: Choose optimal model based on lag structure criteria and check for stability * Calculate annual growth rates for different periods

9 Lag Structure Decision Criteria * Likelihood Ratio Test (LR) * Final Prediction Error (FPE) * Akaike s information criterion (AIC) * Schwarz s Bayesian information criterion (SBIC) * Hannan and Quinn information criterion (HQIC) Sometimes there is mixed evidence that would produce alternative lagged structures or models.

10 The Denton Method Interpolation of a low-frequency flow time series (annual series ) by use of an associated high-frequency "indicator series (monthly series) Adjustment of Monthly or Quarterly Series to Annual Totals: An Approach Based on Quadratic Minimization Frank T. Denton Journal of the American Statistical Association Vol. 66, No. 333 (Mar., 1971), pp Born Education Occupation Employer Frank Denton ( ) October 27, 1930 (age 87) Toronto, Ontario, Canada B.A., Economics, University of Toronto (1952) M.A., Economics, University of Toronto (1954) Economist McMaster University

11 Denton Method Real GDP (v ) and Interpolated Values (x 1000) m1 1999m1 2000m1 2001m1 2002m1 2003m1 2004m1 2005m1 2006m1 2007m1 2008m1 2009m1 2010m1 2011m1 2012m1 2013m1 2014m1 2015m1 2016m1 RealGDPInterp gdpexp

12 The Data * Hourly Wage CANSIM (v Labour force survey estimates (LFS), wages of employees by type of work, North American Industry Classification System (NAICS), sex and age group, unadjusted for seasonality; Newfoundland and Labrador; Average hourly wage rate; Both full- and part-time employees; Total employees, all industries; Both sexes; 15 years and over) * Retail Sales CANSIM (v Retail trade, sales by the North American Industry Classification System (NAICS); Newfoundland and Labrador; Retail trade; Unadjusted) * Residential Unit Sales CREA (Canadian Real Estate Association

13 The Data * Real Gross Domestic Product - CANSIM (v Gross Domestic Product, expenditure-based, provincial and territorial; Newfoundland and Labrador; 2007 chained prices). * Employment CANSIM (v Labour force survey estimates (LFS), by sex and detailed age group, unadjusted for seasonality; Newfoundland and Labrador; Employment (x 1,000); Both sexes; 15 years and over) * Hours Worked CANSIM (v Labour force survey estimates (LFS), by total and average usual and actual hours worked, main or all jobs, type of work, sex and age group, unadjusted for seasonality; Newfoundland and Labrador; Total actual hours; All jobs; Both full- and part-time employment; Both sexes; 15 years and over (x 1,000)

14 The Data * Housing Prices CREA Residential Average Price - creastats.crea.ca/stjo/index.htm * Housing Starts CANSIM (v Canada Mortgage and Housing Corporation, housing starts, under construction and completions in centres 10,000 and over, Canada, provinces, selected census metropolitan areas; Newfoundland and Labrador; Housing starts; Total units) Consumer Price Index (CPI) CANSIM (v Consumer Price Index; Newfoundland and Labrador; All-items)

15 The Data * Brent USD - EIA (US Energy Information Administration) US Prices, Petroleum, Crude Oil, Brent Spot * Oil Production C-NLOPB Total Monthly production

16 Hours Worked (x 1000) Jun-99 Jan-00 Aug-00 Mar-01 Oct-01 May-02 Hours Worked: Actual (v ) and Forecast June 1999 to December 2018 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Hworkf Hwork 12 per. Mov. Avg. (Hworkf) Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Sep-18

17 Employment (x 1000) Employment: Actual (v ) and Forecast June 1999 to December Jun-99 Nov-99 Apr-00 Sep-00 Feb-01 Jul-01 Dec-01 May-02 Oct-02 Mar-03 Aug-03 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 Employf Employ 12 per. Mov. Avg. (Employf)

18 Hourly Wages Hourly Wages: Actual (v213599) and Forecast June 1999 to December Jun-99 Jan-00 Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Sep-18 Wagesf Wages 12 per. Mov. Avg. (Wagesf)

19 Retail Sales (x 1000) Jun-99 Jan-00 Aug-00 Mar-01 Oct-01 Retail Sales: Actual (v ) and Forecast June 1999 to December 2018 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Retailf Retail 12 per. Mov. Avg. (Retailf) Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Sep-18

20 Residential Unit Sales x Jun-99 Jan-00 Aug-00 Mar-01 Oct-01 May-02 Housing Unit Sales: Actual (CREA) and Forecast June 1999 to December 2018 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Hsalesf Hsales 12 per. Mov. Avg. (Hsalesf) Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Sep-18

21 Housing Starts Jun-99 Jan-00 Aug-00 Mar-01 Oct-01 May-02 Housing Starts:Actual (v729951) and Forecast June 1999 to December 2018 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Hstartsf Hstarts 12 per. Mov. Avg. (Hstartsf) Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Sep-18

22 Residential Average Price Average Housing Price: Actual (CREA) and Forecast June 1999 to December Jun-99 Jan-00 Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Sep-18 Hpricesf Hprices 12 per. Mov. Avg. (Hpricesf)

23 Consumer Price Index Jun-99 Jan-00 Aug-00 Mar-01 Consumer Price Index: Actual (v ) and Forecast June 1999 to December 2018 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 CP!f CPI 12 per. Mov. Avg. (CP!f) Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Sep-18

24 Real GDP Real GDP: Extrapolated Values (GDP) and Forecast June 1999 to December Jun-99 Jan-00 Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Sep-18 GDPf GDP 12 per. Mov. Avg. (GDPf)

25 Economic Forecasts 2017 Real GDP Forecast Real GDP Growth CARE Date Completed Growth Rate Jan % Real GDP Growth CARE Date Completed Growth Rate May % CIBC World Markets Feb % Scotiabank Group Mar % TD Economics Dec % BMO Nesbitt-Burns Mar % Conference Board of Canada Nov % RBC Dec % Private Sector Average -2.45% NL Deptartment of Finance Sep % 2017 Employment Forecast Employment Growth CARE Date Completed Growth Rate Jan % CIBC World Markets Feb % Scotiabank Group Mar % TD Economics Dec % BMO Nesbitt Burns Mar % Conference Board of Canada Nov % RBC Dec % Private Sector Avg -1.82% NL Department of Finance Sep % CIBC World Markets Jul % Scotiabank Group Jul % TD Economics Jun % BMO Nesbitt Burns Jul % Conference Board of Feb % Canada RBC Jun % Private Sector Avg -1.93% NL Department of Finance Employment Growth CARE Apr % Date Completed Growth Rate May % CIBC World Markets Jul % Scotiabank Group Jul % TD Economics Jun % BMO Nesbitt Burns Jul % Conference Board of Canada Feb % RBC Jun % Private Sector Avg -2.43% NL Department of Finance Apr %

26 Latest Economic Forecasts Real GDP Forecasts Date Completed CARE Nov CIBC World Market Jul % ScoMbank Group Oct % TD Economics Sep % BMO NesbiS Burns Oct % Coference Board of Canada Jul % RBC Sep % Private Sector Avg -1.70% NL Department of Finance Nov % Employment Growth Date Completed CARE Nov % CIBC World Markets Jul % ScoMabank Group Oct % TD Economics Sep % BMO NesbiS Burns Oct % Conference Board of Canada Jul % RBC Sep % Private Sector Avg -3.10% NL Depatement of Finance Nov %

27 Latest Economic Forecasts Forecast Agency Date Completed Real GDP Growth (%) CARE Nov CIBC World Markets 14-Jul Scotiabank Group 3-Nov TD Economics 28-Sep BMO Nesbitt Burns 17-Nov Royal Bank of Canada 8-Sep National Bank of Canada 28-Sep Conference Board of Canada 1-Nov Private Sector Average Department of Finance 1-Nov Forecast Agency Date Completed Employment Growth (%) CARE 29-Nov CIBC World Markets 14-Jul Scotiabank Group 3-Nov TD Economics 28-Sep BMO Nesbitt Burns 17-Nov Royal Bank of Canada 8-Sep National Bank of Canada 28-Sep Conference Board of Canada 1-Nov Private Sector Average Department of Finance 1-Nov

28 Economic Forecasts CARE 2017: Realgdp -0.96% -2.38% Employment -4.57% -1.89% Hours Worked -5.67% -0.98% Hourly Wage 3.41% 1.95% Retail Sales 2.36% 2.77% ResidenMal Unit Sales -7.27% 5.33% Housing Starts -2.85% % Average Housing Prices -2.14% -2.38% InflaMon 2.40% 1.67%

29 Conclusions Things to Think About When Forecasting * Its about Assumptions and Decisions * The world can change * The data can be revised this happens all the time * You could be wrong * "If you have to forecast, forecast often. " * "He who lives by the crystal ball soon learns to eat ground glass." Edgar R. Fiedler in The Three Rs of Economic Forecasting- Irrational, Irrelevant and Irreverent, June 1977.