Confidence Matters for Nowcasting GDP: Euro Area and U.S. Evidence from a PMI-Based Model

Abstract

This paper assesses the nowcasting performance of confidence in a one-equation model based on the Purchasing Managers Index (PMI). We look at the interactions between the PMI and confidence and the reasons why confidence affects real GDP growth besides the PMI. Moreover, we explain why our model fits euro area and US data differently. Finally, we test for a possible differential relevance of confidence across the business cycle using a smooth transition model. The results underline that confidence always matters in nowcasting the euro area and the US output, both in good and in bad times.

Keywords: Nowcasting, Survey indicators, Confidence, Smooth transition regression

JEL Classification: E32, E37