| US Forecast: January 31, 2002 |
| Forecast Period 2002:1--2005:4 (16 quarters) Data The forecast is based on the national income and product accounts (NIPA) data that were released on January 30, 2002. The Latest Version of the US Model For purposes of this forecast the US model has been reestimated through 2001:4. 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. The changes that have been made to the model since the April 27, 2001, version are discussed in 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 2001:4.
Growth Rates (annual rates)
Current
Forecast Actual
Assumptions 2001:4-1993.3
TRGH 8.0 4.5
COG 3.0/6.0 1.2
JG 1.0 -1.3
TRGS 8.0 7.0
TRSH 7.0 6.5
COS 3.0 (2002:2 on) 6.1
JS 1.0 1.8
EX -10.0/-5.0/0.0/5.0 5.4
PIM 1.5 -1.0
3.0/6.0 means 3.0 for 2002:1-2002:3 and 6.0 thereafter.
-10.0/-5.0/0.0/5.0 means -10.0 for 2002:1, -5.0 for 2002:2,
0.0 for 2002:3, and 5.0 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 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: The predicted growth rate for the current quarter (2002:1) is 3.1 percent. The model is predicting a large inventory correction in 2002:1. The actual value of real inventory investment in 2001:4 was -$120.6 billion, and the model is predicting a value of -$32.3 billion in 2002:1. This is change of $88.3 billion, which by itself is a growth rate of 3.8 percent at an annual rate. The model would thus be predicting a slight negative growth rate in 2002:1 were it not for the inventory correction. The predicted growth rates for the rest of 2002 are 1.8, 1.8, and 2.8 percent respectively per quarter. The unemployment rate is predicted to fall slightly in 2002 (to 5.3 percent by the end of the year). Inflation: Inflation as measured by the growth of the GDP deflator (GDPD) is predicted to be less than 2 percent in 2002 and to rise to 2.4 percent by the end of 2003. Monetary Policy: The Fed lowered the short term interest rate more in 2001:1, 2001:2, 2001:3, and 2001:4 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 rise to 3.0 percent by 2003:1 and to 3.4 percent by 2003:4. If the model continues to underpredict, these forecasts are, of course, too high. Other Variables: The federal government budget surplus in the national income accounts (SGP) is forecast to fall gradually to about zero by the end of 2005. As noted above, the assumption about COG is that it will grow at 6 percent from 2002:4 on. This may be too low, given the current budget proposals of President Bush, and so the surplus may fall more quickly than the model is predicting. The U.S. current account deficit (variable -SR in the model) is forecast to be extremely large throughout the period (between $449.9 and $6418.5 billion). Possible Experiments to Run The current forecast is a good base from which to make alternative assumptions. On the positive side, you can decrease tax rates (if you think a stimulus package will be passed) and increase government spending (if you think that COG will grow more rapidly than assumed for the forecast). You can also drop the interest rate rule (equation 30) and put in lower values for the bill rate (if you think that the model has overpredicted the bill rate). On 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: January 31, 2002 |
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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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