A nowcasting approach to generate timely estimates of Mexican economic activity: An application to the period of COVID-19

In this paper, we present a new approach based on dynamic factor models (DFMs) to perform nowcasts for the percentage annual variation of the Mexican Global Economic Activity Indicator (IGAE in Spanish). The procedure consists of the following steps: i) build a timely and correlated database by using economic and financial time series and real-time variables such as social mobility and significant topics extracted by Google Trends; ii) estimate the common factors using the two-step methodology of Doz et al. (2011); iii) use the common factors in univariate time-series models for test data; and iv) according to the best results obtained in the previous step, combine the statistically equal better nowcasts (Diebold-Mariano test) to generate the current nowcasts. We obtain timely and accurate nowcasts for the IGAE, including those for the current phase of drastic drops in the economy related to COVID-19 sanitary measures. Additionally, the approach allows us to disentangle the key variables in the DFM by estimating the confidence interval for both the factor loadings and the factor estimates. This approach can be used in official statistics to obtain preliminary estimates for IGAE up to 50 days before the official results.
Comment: 29 pages, 8 figures, 1 table and 1 annex