US Forecast: January 31, 2025
Executive Summary
Actual Values
Quarter %GDPR %GDPD UR RS
2021.1 5.63 5.49 6.25 0.05
2021.2 6.43 6.01 5.91 0.03
2021.3 3.45 6.32 5.10 0.05
2021.4 7.41 6.96 4.21 0.05
2022.1 -1.03 8.38 3.84 0.31
2022.2 0.28 9.39 3.65 1.08
2022.3 2.72 4.58 3.55 2.66
2022.4 3.35 3.74 3.59 4.04
2023.1 2.80 3.69 3.51 4.63
2023.2 2.45 1.83 3.55 5.07
2023.3 4.36 3.21 3.68 5.29
2023.4 3.19 1.55 3.77 5.28
2024.1 1.63 3.03 3.80 5.23
2024.2 2.99 2.54 3.97 5.24
2024.3 3.07 1.89 4.17 4.99
2024.4 2.25 2.18 4.15 4.40
Predicted Values
2025.1 3.61 1.30 3.91 4.52
2025.2 3.08 1.46 3.74 4.81
2025.3 3.01 1.75 3.64 4.91
2025.4 2.86 1.98 3.58 4.91
2026.1 2.78 2.11 3.56 4.92
2026.2 2.81 2.18 3.56 4.95
2026.3 2.86 2.23 3.58 4.98
2026.4 2.92 2.26 3.59 4.99
2027.1 2.98 2.30 3.60 5.01
2027.2 3.04 2.34 3.61 5.04
2027.3 3.09 2.40 3.61 5.07
2027.4 3.14 2.47 3.61 5.10
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
Ex Post Dynamic Simulation 2024.1--2024.4
Real GDP Unemployment Rate GDP Deflator
Qtr. Act. Pred. %Err Act. Pred. Err Act. Pred. %Err
2023.4 22961. 3.77 123.24
2024.1 23054. 23122. 0.3 3.80 3.66 -0.14 124.16 123.57 -0.5
2024.2 23224. 23265. 0.2 3.97 3.58 -0.39 124.94 124.22 -0.6
2024.3 23400. 23471. 0.3 4.17 3.49 -0.68 125.53 124.96 -0.5
2024.4 23531. 23638. 0.5 4.15 3.42 -0.73 126.21 125.77 -0.3
total chg 2.5% 2.9% 0.38 -0.35 2.4% 2.1%
Forecast Period
2025.1--2027.4 (12 quarters)
Data
The forecast is based on the national income and product accounts (NIPA) data that were released on January 30, 2025. 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 equation 28 has been dropped, so the variable UB is 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
COG 2.0
JG 0.0
TRGSQ 0.0
COS 2.0
JS 0.0
These five variables are government policy variables in the model. 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, COS is real state and local government purchases of goods, and JS is state and local government employment. All tax-rate variables in the model were assumed to be unchanged from their 2024.4 value, so no tax-rate changes addumed.
The ratio of the financial saving of the state and local governments to GDP (SS/GDP) was -0.006 in 2024.4. TRSH was chosen for each quarter of the forecast period to have SS/GDP be -0.006, where TRSH is state and local government transfer payments to households. Real state and local government transfer payments to households (TRSHQ) was then taken to be TRSH/GDPD.
The ratio of federal government current expenditures less interest payments to GDP was 0.2 in 2024.4. TRGH was chosen for each quarter of the forecast period to have this ratio be 0.2, where TRGH is federal government transfer payments to households. Real federal government transfer payments to households (TRGHQ) was then taken to be TRGH/GDPD.
The ratio of export revenue minus import costs to GDP ((PEX*EX-PIM*IM)/GDP) was -0.032 in 2024.4. Nominal exports was chosen for each quarter of the forecast period to have this ratio be -0.032, and real exports (EX) was taken to be nominal exports divided by PEX.
Some of the other assumptions for the forecast are as follows (all growth rates are at annual rates): the price of imports (PIM) growing at the same rate as the private non farm price deflatior (PF), potential output (YS) growing at 2.1 percent, labor productivity (LAM) growing at 2.0 percent, and the relative price of housing (PSI14) growing at 4 percent.
Regarding monetary policy, the estimated Fed rule, equation 30, is used, and so monetary policy is endogenous.
Nothing was done about possible spending changes and tax changes from the new administration. This forecast is conditional on the assumption of nothing dramatic done regarding fiscal policy. This assumption is likely unrealistic, but until more is known about future fiscal-policy plans, it is hard to know what else to assume.
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
3.6, 3.1, 3.0, and 2.9 percent (annual rates),
respectively. The
unemployment rate is roughly flat throughout the forecast period,
as is the growth rate of real GDP. This forecast, of strong growth and
low unemployment, is driven in part by the expansive fiscal policy
discussed above regarding TRGHQ.
With no bad shocks, the economy is predicted to be
very strong. The above fiscal-policy assumptions imply a large
primary deficit, and the federal debt to GDP ratio (AGZGDP) rises from 0.842 in
2024.4 to 0.928 in 2027.4. The ratio of federal interest payments to GDP
(INTGZGDP) rises from 0.0363 to 0.0521.
Inflation:
Inflation as measured by the
growth rate of the GDP deflator
in the next four quarters is 1.3, 1.5, 1.7, and 2.0 percent,
respectively. It rises to 2.5 percent by the end of the forecast period.
Monetary Policy
The Fed is predicted to keep the interest
rate at about 5 percent throughout the forecast period. This, of course,
is conditional on the fact that the unemployment rate is flat and
inflation is slightly above 2 percent.
Possible Experiments to Run
This forecast assumes no 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 and 2). 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. See the discussion in Section 7.2 of The US Model Workbook, January 31, 2025. 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.