| US Forecast: October 31, 2003 |
| Forecast Period 2003:4--2007:4 (17 quarters) Data The forecast is based on the national income and product accounts (NIPA) data that were released on October 30, 2003. The Latest Version of the US Model For purposes of this forecast the US model has been reestimated through 2003:3. These estimates and the complete specification of the model are presented in The US Model Appendix A: October 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 2003:3.
Growth Rates (annual rates)
Current
Forecast Actual
Assumptions 2003:3-1993.3
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 5.2
JS 1.0 1.6
EX 3.0/6.0 5.0
PIM 1.5 -0.1
3.0/6.0 means 3.0 for 2003:4 and 6.0 thereafter.
The first seven variables are the main government policy variables in the model aside from tax rates. Regarding fiscal policy, no further tax cuts are assumed for this forecast. No assumption is needed about monetary policy 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 5.8, 3.9, 3.1, and 2.9 percent, respectively. The large increase for the current quarter is because of a large predicted increase in inventory investment. These growth rates are high enough to drive the unemployment rate to 5.0 percent by the end of 2004. Inflation: Inflation as measured by the growth of the GDP deflator (GDPD) is predicted to rise to 3.0 percent by the end 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 2.8 percent by the end 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). The U.S. current account deficit (variable -SR in the model) is forecast to be extremely large throughout the period. It is predicted to be $674.1 billion in the fourth quarter of 2004. 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 is currently high relative to earnings. 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: October 31, 2003 |
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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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