US Forecast: November 1, 2001 |
Forecast Period 2001:4--2005:4 (17 quarters) Data The forecast is based on the national income and product accounts (NIPA) data that were released on October 31, 2001. The Latest Version of the US Model For purposes of this forecast the US model has been reestimated through 2001:3. These estimates are presented in the "Chapter 5 tables" at the end of The US Model Workbook. The rest of the specification of the model is in Appendix A at the end of this workbook. A complete discussion of the April 27, 2001, version of the US model is in Macroeconometric Modeling, which is the main reference for this site. Two changes were made for the current version (November 1, 2001). First, equation 9, which explains the demand for money of the household sector, has an exogenous variable, T941A, added, which equals T-168 from 1994:1 on and 0 otherwise. Second, equation 11, the inventory investment equation, is now estimated in log form. For discussion of the various versions of the models on this site, see Current Versions and References and Previous Versions and References. Assumptions Behind the Forecast The following table gives the growth rates that were assumed for the current forecast for the key exogenous variables in the model along with the actual growth rates between 1993:3 and 2001:3. Growth Rates (annual rates) Current Forecast Actual Assumptions 2001:3-1993.3 TRGH 8.0 4.5 COG 3.0 0.9 JG 1.0 -1.3 TRGS 8.0 7.0 TRSH 7.0 6.5 COS 3.0 5.8 JS 1.0 1.8 EX 1.0/4.0 6.1 PIM 1.5 -1.1 1.0/4.0 means 1.0 for 2001:4-2002:3 and 4.0 thereafter. The first seven variables are the main government policy variables in the model aside from tax rates. The tax cut package that was passed by Congress and signed by President Bush in May of this year has been incorporated into the current forecast. The Joint Committee on Taxation has estimates of the tax reductions by fiscal year, and these estimates were used as a guide in choosing values for D1G, the personal income tax parameter in the model. D1G was adjusted in the manner discussed in Section 5.2 of The US Model Workbook, experiment 5.5. You can examine the values for D1G to see what was done. The tax reduction was about $160 billion at an annual rate in 2001:3 because of the tax rebates. The tax reduction in each quarter of the current fiscal year is about $75 billion at an annual rate, and this rises to a little over $100 billion by 2004. No additional tax cuts were incorporated into the current forecast, although Congress may pass more. No assumption about monetary policy is needed for the forecast because monetary policy is endogenous. Monetary policy is determined by equation 30, an estimated interest rate reaction function or rule. The Results Selected forecast results are present in the tables that follow this memo. If you want more detail, click "Solve" in the left menu under "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. Although the model is used to forecast through 2005:4, you should not put much confidence on the results beyond about 2003. Forecast error bands are fairly large for predictions out a number of years. Real Growth and the Unemployment Rate: There is essentially no growth forecast for the next three quarters: growth rates of 0.0, 0.2, and 0.5 percent. The unemployment rate is predicted to rise to 5.7 percent by 2002:3. As sluggish as this forecast is, it may in fact be too optimistic. There is no way in the model without subjectively adjusting the consumption equations to incorporate possible negative demand shocks due to September 11 and what followed. If there are such shocks, then the consumption equations are likely to overpredict consumption. Also, the values used for exports may be too large: EX is assumed to grow at 1 percent for the next year and then 4 percent thereafter. If there is a serious slowdown abroad, U.S. exports may not do this well. Working in the opposite direction, on the other hand, are possible changes to monetary and fiscal policy that are not incorporated into the current forecast. As discussed below, the model is overpredicting the short term interest rate, and if the Fed keeps the interest rate as low or lower than it currently is, this is stimulus not incorporated into the forecast. Also, if Congress passes further tax cuts or additional spending, this is extra stimulus. The current forecast should thus be looked upon as a forecast of what would happen in a no shock world with no further monetary and fiscal policy stimulus and no serious slowdown abroad. It is a base forecast from which various experiments can be made. You may ask why the model is predicting no growth for the next three quarters if no negative shocks are assumed? Two reasons are 1) the recent drop in household wealth from the fall in the stock market and 2) the currently large stocks of durable goods and housing due to large past values of durable goods spending and housing investment. Other things equal, large stocks of durable goods and housing have negative effects on future durable goods spending and housing investment. In other words, these "initial conditions" are negative regarding future demand. Inflation: Inflation as measured by the growth of the GDP deflator (GDPD) is predicted to be less than or around 2 percent throughout the forecast period. Monetary Policy: The Fed lowered the short term interest rate more in 2001:1, 2001:2, and 2001:3 than the model predicted. (You can see this by estimating the model in Eviews or the FP program and examining the estimated residuals for equation 30.) The estimated interest rate rule (equation 30) is predicting that the three month bill rate (RS) will be around 3 percent during the forecast period. RS is already lower than this on a monthly basis, and so the model is continuing to overpredict the bill rate. Other Variables: The federal government budget surplus in the national income accounts (SGP) is forecast to fall to zero by about 2004. Remember, however, that the current forecast assumes no further tax cuts and government spending increases. If there are such cuts or increases, the surplus will fall to zero faster. The U.S. current account deficit (variable -SR in the model) is forecast to be extremely large throughout the period (between $381.0 and $641.6 billion). Possible Experiments to Run As noted above, the current forecast is a good base from which to make alternative assumptions. On the negative side, you can shock (through constant adjustments) the consumption equations 1, 2, and 3. You can also shock the investment equations 4 and 12. On the positive side, you can decrease tax rates and increase government spending. You can also drop the interest rate rule (equation 30) and put in lower values for the bill rate. Back to the negative side, if you think there will be an oil price shock, you can increase PIM. The assumption about PIM for the current forecast is that it will grow at an annual rate of 1.5 percent throughout the forecast period. You may also want to use lower values for exports (EX) than the forecast uses if you think there will be a serious slowdown abroad. Finally, you may want to crash the stock market if you think it is overvalued in light of future economic predictions. |
US Forecast Tables: November 1, 2001 |
Table F1: Forecasts of Selected Variables--Real GDP
and Components
Table F1 (continued)--Prices and Wages Table F1 (continued)--Money and Interest Rates Table F1 (continued)--Employment and Labor Force Table F1 (continued)--Other Endogenous Table F1 (continued)--Selected Exogenous Table F2: Forecasts of the Federal Government Budget Table F3: Forecasts of the State and Local Government Budget Table F4: Forecasts of Savings Flows NIPA Table 1.1 NIPA Table 1.2 NIPA Table 3.2 NIPA Table 3.3 NIPA Table 7.1 |
Table F1: Forecasts of Selected Variables |
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Table F1 (continued) |
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Table F1 (continued) |
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Table F1 (continued) |
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Table F1 (continued) |
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Table F1 (continued) |
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Table F2: Forecasts of the Federal Government Budget |
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Table F3: Forecasts of the State and Local Government Budget |
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Table F4 Forecasts of Savings Flows |
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NIPA Table 1.1 |
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NIPA Table 1.2 |
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NIPA Table 3.2 |
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NIPA Table 3.3 |
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NIPA Table 7.1 |
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