From accounting to economics:the role of aggregate special items in gauging the state of the economy

We establish two channels for the flow of macroeconomic information from accounting earnings to the macroeconomy: a persistence channel via changes in accounting earnings before special items and a conservatism channel via recognition of special items. Prior studies using aggregate accounting earnings to forecast Gross Domestic Product (GDP) growth implicitly assumed only the former channel and have overlooked the substantial macroeconomic information content in the latter one. In this paper, we propose and find empirically that special items aggregate to dominate accounting earnings in forecasting and nowcasting GDP growth. We also find that professional macro forecasters incorporate information in earnings before special items in their forecasts and nowcasts but do not incorporate the information content of special items. This result is likely due to economic research discounting the information content of aggregate special items because National Income Product Accounts (NIPA) corporate profits are purged of special items. These findings provide an important step in understanding the distinct role of accounting for assessing future macroeconomic conditions.