Saturday, February 26, 2011

GDP and the Price of Crude Oil

I read that Gross Domestic Product (GDP) lags the price of crude oil.  When the price goes up, then GDP goes down.  I decided to look into this and produced the chart below of actual and predicted GDP as a function of time. Since the lag is about 6 months, the predictions extend 6 months into the future. Note that the prediction shows a significant drop in GDP by September 2011 (Which agrees with many analysts).

This is a Google Document, so I'll try and update as new data is available.

I scaled the Oil Prices to 2010 dollars using the CPI data. Then, I used the following simple formula:

GDP_Predicted(date) = a * OilPrice(date - lag) + b

I know that there are many other factors driving GDP, but there seems to be an apparent correlation here. Time will tell whether the predictions show any validity. I probably should have learned my lesson on trying to predict financial futures, since my Stock Predictions failed about 7 months ago (most likely due to Bernanke's QE2).

Data Sources
Oil prices

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