From Accounting to Economics: The Role of Aggregate Special Items in Gauging the State of the Economy

ABSTRACT We propose and find that aggregate special items conveys more information about future real GDP growth than earnings before because the former contains advance news economic outcomes. A two-stage rational expectations test reveals professional forecasters fully understand content of items, but underestimate when revising their forecasts. Using vector autoregressions, we show has predictive ability for because, as suggested by previous literature, it acts a proxy corporate profits included in national income. In contrast, captures changes behavior agents on timely basis, which, turn, have effects firms' investment hiring, well consumers' wealth spending. Consistent with news-driven business cycles, produces synchronized movements across macroeconomic aggregates. JEL Classifications: E01; E32; E60; M41.