| US Forecast: July 31, 2003 |
| Forecast Period 2003:3--2006:4 (14 quarters) Data The forecast is based on the national income and product accounts (NIPA) data that were released on July 31, 2003. The Latest Version of the US Model For purposes of this forecast the US model has been reestimated through 2003:2. These estimates and the complete specification of the model are presented in The US Model Appendix A: July 31, 2003, which is an update of Appendix A in Fair (2003). No specification changes have been made to the model from the version in Fair (2003). 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 2003:2.
Growth Rates (annual rates)
Current
Forecast Actual
Assumptions 2003:2-1993.3
TRGH 8.0 5.3
COG 3.0 3.8
JG 1.0 -1.1
TRGS 8.0 7.7
TRSH 7.0 6.2
COS 3.0 5.1
JS 1.0 1.7
EX 3.0/5.0/6.0 4.9
PIM 1.5 -0.2
3.0/5.0/6.0 means 3.0 for 2003:3 and 2003:4, 5.0 for 2004:1-2004:4,
and 6.0 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. 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, including, as noted above, an exogenous variable like D1G. Real Growth and the Unemployment Rate: The predicted growth rates for the next four quarters are 4.1, 3.6, 3.5, and 3.4 percent, respectively. The unemployment rate is predicted to fall to 5.6 percent by the middle of 2004. Inflation: Inflation as measured by the growth of the GDP deflator (GDPD) is predicted to rise to 2.5 percent by the middle of 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 2.3 percent by the middle of 2004. Other Variables: The federal government is now running a 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). By the end of 2004 the deficit is about $400 billion (remember this is the deficit as measured in the NIPA accounts). This $400 billion is smaller than the federal government is projecting the deficit to be, and so the model is more optimistic about the government's budget than is the government. The U.S. current account deficit (variable -SR in the model) is forecast to be extremely large throughout the period (between $595.0 and $744.9 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 the values used for the forecast are too high. On the contractionary 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 that the values used for the forecast are too high. Regarding the stock market, the S&P 500 index increased about 120 points in the second quarter of 2003, which is a gain in household wealth of about $1.2 trillion. 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. At the time of this writing the S&P 500 index is about 1000. If you think this is too high and that the index will fall to, say, 800, you should drop the equation for CG and change CG by about -$2,000 billion at a quarterly rate (-$8,000 billion at an annual rate). See the discussion in Section 7.2 of The US Model Workbook. |
| US Forecast Tables: July 31, 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 |
|