| US Forecast: January 30, 2003 |
| Forecast Period 2003:1--2006:4 (16 quarters) Data The forecast is based on the national income and product accounts (NIPA) data that were released on January 30, 2003. The Latest Version of the US Model For purposes of this forecast the US model has been reestimated through 2002:4. 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 2002:4.
Growth Rates (annual rates)
Current
Forecast Actual
Assumptions 2002:4-1993.3
TRGH 8.0 5.1
COG 3.0 3.0
JG 1.0 -1.0
TRGS 8.0 7.4
TRSH 7.0 6.3
COS 3.0 5.5
JS 1.0 1.7
EX 1.0/5.0 5.4
PIM 1.5 -0.4
1.0/5.0 means 1.0 for 2003:1 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 2001 has been incorporated into the 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 $90 billion at an annual rate, and this rises to a little over $100 billion by 2004. 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 2006:4, you should not put much confidence on the results beyond about 2004. Forecast error bands are fairly large for predictions out a number of years. Real Growth and the Unemployment Rate: The predicted growth rates for the four quarters of 2003 are 2.7, 2.7, 2.8, and 3.1 percent respectively. The unemployment rate is predicted to remain roughly unchanged throughout the forecast period. Inflation: Inflation as measured by the growth of the GDP deflator (GDPD) is predicted to be about 2 percent in 2003 and 2.4 percent in 2004. 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 2.1 percent by the end of 2003. Other Variables: The federal government is now running a fairly large budget deficit, and the model is predicting that the deficit will continue to be large throughout the forecast period (see the predicted values for SGP). The U.S. current account deficit (variable -SR in the model) is forecast to be extremely large throughout the period (between $530.4 and $649.7 billion). Possible Experiments to Run The current forecast is a good base from which to make alternative assumptions. On the side of stimulus, you can increase government spending (if you think that COG will grow more rapidly than assumed for the forecast, perhaps because of increased defense spending). 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). You can also lower the tax rate D1G if you think that a tax rate cut will be passed. (The present forecasts assumes no further tax cuts from those already passed.) On the contractionary side, if you think there will be an oil price shock (perhaps because of a U.S. invasion of Iraq), 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. Regarding the stock market, the large fall in equity prices in the second and third quarters of 2002 is incorporated into the current forecast. (The value of CG was -$1,765 billion in 2002:2, -$1,990 billion 2002:3, and $600 billion 2002:4.) Each fall in the S&P 500 index of 10 points is a change in CG of about -$100 billion. At the time of this writing the S&P 500 index is about 850, and if you think it will go to, say, 700 before the stock market correction is over, you should drop the equation for CG and change CG by about -$1,500 billion at a quarterly rate (-$6,000 billion at an annual rate). See the discussion in Section 7.2 of The US Model Workbook. |
| US Forecast Tables: January 30, 2003 |
|
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 |
|
| Table F1 (continued) |
|
| Table F1 (continued) |
|
| Table F1 (continued) |
|
| Table F1 (continued) |
|
| Table F1 (continued) |
|
| 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 |
|