head> US Forecast Memo
US Forecast: January 30, 2020
Forecast Period

2020:1--2025:4 (24 quarters)


The forecast is based on the national income and product accounts (NIPA) data that were released on January 30, 2020.

The Latest Version of the US Model

For purposes of this forecast the US model has been reestimated through 2019:4. These estimates and the complete specification of the model are presented in Appendix A: The US Model: January 30, 2020. A complete discussion of this January 28, 2018, version of the US model is in Macroeconometric Modeling: 2018. The current version is the same as the January 28, 2018, version except that it has been estimated through 2019:4 rather than 2017:4.

Unless otherwise noted, the flow variables in the model are presented in this memo and on the site at quarterly rates. This is a change from versions dated July 31, 2011, and back, where the flow variables were presented at annual rates. To convert quarterly rates to annual rates, just multiply by four.

Assumptions Behind the Forecast

The table below gives the growth rates that were assumed for the key exogenous variables in the model along with the actual growth rates between 2010:1 and 2019:4.

                 Growth Rates (annual rates)

           Forecast                         Actual     
          Assumptions                   2010:1-2019:4  

TRGHQ         4.0                            0.5       
COG           1.0                           -0.2       
JG            1.0                            0.4       
TRGSQ         2.0                            0.8       
TRSHQ         2.0                            7.0       
COS           1.0                            0.4
JS            1.0                            0.1       
EX            1.0/1.0/1.0/1.0/3.0...         3.1
PIM           0.0                           -0.2

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. The forecast assumptions for the federal government spending variables incorporate the provisions of the expenditure bill that was passed in February 2018, using primarily estimates from the Congressional Budget Office. The notation for real exports, EX, means that EX was assume to grow at an annual rate of 1.0 percent for the first four quarters and then 3.0 percent after that.

All tax rates were taken to remain unchanged from their 2019:4 values except for the personal income tax rate, D1G, and the corporate profit tax rate, D2G, which are affected by the tax bill that was passed at the end of 2017. Estimates from the Joint Committee on Taxation, December 18, 2017, were used to guide the choice of values for D1G and D2G. Also, TRFG, which is the value of transfers from firms to the federal government, was changed to reflect the Committee's estimates of the revenue gained from the repatriation of profits from abroad. And TBGQ, taxes paid by the financial sector to the federal government, was changed to incorporate the effects of the tax bill. So four variables were changed to reflect the tax-law changes. You can examine these variables as discussed below.

The above assumptions regarding the state and local government variables result in roughly balanced budgets over time in the forecast.

No assumption is needed about monetary policy for the forecast because monetary policy is endogenous. Monetary policy is determined by equation 30, an estimated interest rate reaction function or rule.

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 current version" after "US Model," 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 growing at 3.5, 2.8, 2.4, and 22.3percent in the next four quarters, respectively. It is then predicted to grow between 2.3 and 2.7 percent for the rest of the horizon. (All growth rates in this memo are at annual rates.) The unemployment rate is around 4 percent throughout the forecast period.

Inflation: Inflation as measured by the growth of the GDP deflator (GDPD) is about 2.0 percent in the next four quarters and then ranges between 1.6 percent and 1.9 percent.

Monetary Policy: The estimated interest rate rule (equation 30) is predicting that the three month bill rate (RS) will gradually rise to 2.9 percent by the end of 2022. It rises to 4.2 percent by the end of 2025.

Federal Government Budget: The federal government budget deficit as a percent of GDP, variable SGPZGDP, rises from its current value of 5.6 percent to 7.6 percent by the end of 2025. The debt/GDP ratio, variable AGZGDP, is 0.96 at the end of 2025, up from 0.73 in 2019:4. It was 0.46 in 2007:1. The federal government debt, variable -AG, is $27.2 trillion at the end of 2025. Interest payments of the federal government as a percent of GDP, variable INTGZGDP, rises from its current value of 2.5 percent to 4.8 percent at the end of 2025. At the end of 2025 the value of federal government interest payments, variable INTG, is $1.3 trillion at an annual rate. The federal government deficit, variable -SGP, is $2.1 trillion at an annual rate.

U.S. Current Account: The deficit in the U.S. current account, variable -SR, is roughly constant throughout the period.

Comments on the Forecast and Possible Experiments to Run

The fairly large forecast of 3.5 percent growth in the first quarter of 2020 is in part due to a predicted inventory correction and to positive wealth effects from the rapid rise in equity prices in 2019:4. Otherwise the growth rates are between 2.3 percent and 2.8 percent. The unemployment rate gradually rises to 4.5 percent by 2022 and then gradually falls to 3.9 percent by the end of 2025. The bill rate gradually rises to 4.2 percent by the end of 2025. This forecast assumes no bad financial shocks. The growth predictions would be worse if there are. Possible bad shocks are financial market reactions to the growing federal government deficit and debt, tariff issues, and virus issues. 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, housing prices, and import 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, housing prices, exchange rates, and oil 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), housing prices (variable PSI14), and import prices (variable PIM) are changed. This allows one to examine the sensitivity of the forecast to changes in these values.

To review, oil price shocks and exchange rate shocks are handled through changes in PIM. 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, 400 points, you should drop the equation for CG and change CG by about -$4,000 billion. See the discussion in Section 7.2 of The US Model Workbook, January 30, 2020. This will have a negative effect on real output growth because of a negative wealth effect.