The Latest Forecast

US Forecast: October 31, 2022

Executive Summary

                    Actual Values
                                           (exog)
     Quarter    %GDPR    %GDPD      UR       RS

      2022.1    -1.63     8.35     3.81     0.31
      2022.2    -0.58     9.10     3.62     1.08
      2022.3     2.56     4.07     3.53     2.66

                  Predicted Values

      2022.4     0.37     4.09     3.64     4.50
      2023.1    -0.33     3.67     3.98     5.00
      2023.2    -0.26     3.15     4.42     5.00
      2023.3     0.50     2.93     4.87     5.00
      2023.4     1.27     3.02     5.24     5.00
      2024.1     1.74     3.18     5.54     5.00
      2024.2     2.02     3.37     5.77     5.00
      2024.3     2.18     3.57     5.94     5.00
      2024.4     2.26     3.78     6.05     5.00
      2025.1     2.30     4.00     6.14     5.00
      2025.2     2.32     4.21     6.20     5.00
      2025.3     2.34     4.42     6.24     5.00
      2025.4     2.37     4.63     6.27     5.00

Notes: %GDPR = percentage change in real GDP, annual rate
       %GDPD = percentage change in the GDP deflator, annual rate
         UR  = unemployment rate, percentage points
         RS  = three-month Treasury bill rate, percentage points

Forecast Period

2022.4--2025.4 (13 quarters)

Data

The forecast is based on the national income and product accounts (NIPA) data that were released on October 27, 2022. Unless otherwise noted, the flow variables in the model are presented in this memo and on the site at quarterly rates. To convert quarterly rates to annual rates, just multiply by four.

Background

For this forecast equations 25, 28, and 30 have been dropped, so the variables CGZ, LUB, and RS are exogenous,

Assumptions Behind the Forecast

The table below gives the growth rates that were assumed for some of the key exogenous variables in the model.

         Assumed Growth Rates (annual rates)

           Forecast             
          Assumptions           

TRGHQ         3.0
COG           3.0
JG            0.0
TRGSQ         0.0
TRSHQ         3.0
COS           3.0
JS            1.0
EX            5.0
PIM           9.0

The first seven variables are the main government policy variables in the model aside from tax rates. TRGHQ is real federal government transfer payments to households, COG is real federal government purchases of goods, JG is federal government civilian employment, TRGSQ is real federal government transfer payments to state and local governments, TRSHQ is real state and local government transfer payments to households, COS is real state and local government purchases of goods, JS is state and local government employment, EX is real exports, and PIM is the import price deflator.

Some of the other assumptions for the forecast are as follows (all growth rates are at annual rates): tax rates unchanged from their 2022.3 values, potential output (YS) growing at 2 percent, labor productivity (LAM) growing at 1.5 percent, and the relative price of housing (PSI14) growing at 5 percent.

Regarding monetary policy, the estimated Fed rule, equation 30, has been dropped and RS has been taken to be 4.5 in 2022.4 and then 5.0 after that through 2025.4. This may be close to what the Fed will do, but this is obviously uncertain.

Nothing was done about possible spending changes and tax changes from future bills that might be passed. The current forecast is obviously a conditional forecast, conditional on nothing dramatic done regarding fiscal policy.

The Forecast

Forecasts of selected variables are presented in the following: Forecasts of selected variables---html, Forecasts of selected variables---pdf file. If you want more detail, click "SOLVE", create a data set, and then go immediately to "Examine the results without solving the model." You can then examine any variable in the model.

Real GDP Growth and the Unemployment Rate:
The forecast has real GDP changing in the next four quarters at 0.4, -0.3, -0.3, and 0.5 percent (annual rates), respectively. The prediction is thus for roughly no change in real GDP in the next four quarters. Because of this, the unemployment rate rises to 4.9 percent by 2023.3. The real GDP growth rate rises to 2.0 percent by the middle of 2024 and stays at roughly this value. The unemployment rate rises to 6.3 percent by the end of 2025. One of the reasons for this sluggish forecast is a negative wealth effect from the fall in stock prices. Another reason is the higher values of the bill rate set by the Fed.

Inflation:
Inflation as measured by the growth of the GDP deflator in the next four quarters is 4.1, 3.7, 3.1, and 2.9 percent, respectively. The fall in inflation is because of the sluggish economy. Inflation then rises after that as the economy picks up. It is 4.6 percent by the end of 2025. All these inflation rates are, of course, higher than the Fed's goal of 2.0 percent.

Possible Experiments to Run

This forecast assumes no further bad financial shocks going forward. The growth predictions would be worse if there are. Possible bad shocks are financial market reactions to growing inflation. Below is a discussion of how to incorporate these shocks into the model.

The assumption of no bad shocks, which is used for the forecast, means that stock prices and housing prices grow at historically normal rates. There are no negative wealth shocks through falling stock prices and housing prices. Changes in asset prices like stock prices and housing prices are essentially unpredictable. One can use the US model to analyize the effects of asset price shocks, but the shocks themselves cannot be predicted. The best one can do in a forecast is to assume some historically average behavior of asset prices, which has been done here.

To examine the effects of asset price shocks, experiments can be run using the model in which stock prices (variable CG) and housing prices (variable PSI14) are changed. This allows one to examine the sensitivity of the forecast to changes in these values. Import prices (variable PIM) can be changed to examine the effects of oil price shocks and exchange rate shocks.

To review, housing price changes are handled through changes in PSI14. Changes in PSI14 change PKH relative to PD and thus change housing wealth, PIH*KH. This affects consumption expenditures through the total wealth variable AA (equations 1, 2, and 3). It affects housing investment through the housing wealth variable AA2 (equation 4). Regarding the stock market, each change in the S&P 500 index of 10 points is a change in CG, the capital gains variable in the model, of about $100 billion. If you think that the S&P index will fall, say, 500 points, you should CG by about -$5,000 billion. (The CG equation is dropped for the forecast.) See the discussion in Section 7.2 of The US Model Workbook, October 31, 2022. This will have a negative effect on real output growth because of a negative wealth effect.

Other possible experiments are to change the various exogenous government policy variables in the model.