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

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.