The Surprise Inside the Surprise Index

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Citigroup’s Citi Surprise Index (CSI) is a real-time model, designed to analyze the accuracy of Wall Street’s economic forecasts. A positive index value indicates that recent economic data is stronger than the consensus of economists’ expectations. A negative reading denotes economic data that is worse than expectations. Unbeknownst to most investors, the CSI also serves as a gauge of sentiment and provides unique insight into how well economists understand the current economic cycle.

Appreciation for the multitude of messages provided by the CSI allows investors to stay a step ahead of the economic models that Wall Street, and -- by default -- most investors, rely heavily on to forecast market levels and securities prices. This is more important than ever now as markets are more concerned with how economic data deviates from forecasts and less concerned with the absolute reading of the very same data and what it signifies for economic growth.

The Citi Surprise Index

The graph below plots the CSI since 2003. Positive readings are in green and negative readings in red. A positive reading means economists have underestimated economic data, thus the label “pessimistic” in green at the top. Conversely, negative readings indicate economists have overestimated economic data, thus the label “optimistic” at the bottom. The figures below selected points are the number of days the index was consecutively negative (more on that later).

The simple takeaway from the chart is that economists constantly shift between periods in which they are overly optimistic and overly pessimistic. This gyration is to be expected as economists notice errors in their forecasts and adjust their models to reflect the current environment. Interestingly, the adjustments do not result in better forecasts, as evidenced by the continual seesaw pattern of the index.

The second graph further highlights this point by plotting the one-year volatility (standard deviation) of the index. This graph illustrates the extent to which economists’ consensus forecasts deviated from the actual outcome without regard for direction. Since 2003, there were gradual ebbs and flows in the volatility of the index but not a clear sustainable downward trend, which would signal an improvement in forecasting skills.

Citi Surprise Index since 2003

Data Courtesy; Bloomberg, Citigroup, 720 Global

Citi Surprise Index with 252 day Volatility Overlay

Data Courtesy; Bloomberg, Citigroup 720 Global