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Estimation of short‐run predictive factor for US growth using state employment data

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  • Arabinda Basistha

Abstract

We estimate a predictive single factor model targeted to unobserved common growth in gross domestic product and gross domestic income (GDI) using a state‐space framework with select state employment data. We use likelihood‐based comparison to select the states to estimate the dynamic factor. The results show improved in‐sample and out‐of‐sample performance than threshold principal component factors and financial spreads. Out‐of‐sample evaluations indicate larger gains for GDI growth with 14% to 20% lower mean squared forecast errors than other alternatives. Sectoral employment factors based on selected sectors using the state‐space framework also show forecasting gains. An expanded model using both sectoral and state employment data shows that their common component is the primary predictive factor.

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  • Arabinda Basistha, 2023. "Estimation of short‐run predictive factor for US growth using state employment data," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 42(1), pages 34-50, January.
    • Handle: RePEc:wly:jforec:v:42:y:2023:i:1:p:34-50
    DOI: 10.1002/for.2896
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