| US Forecast: July 31, 2004 |
| Forecast Period 2004:3--2008:4 (18 quarters) Data The forecast is based on the national income and product accounts (NIPA) data that were released on July 30, 2004. The Latest Version of the US Model For purposes of this forecast the US model has been reestimated through 2004:2. These estimates and the complete specification of the model are presented in The US Model Appendix A: July 31, 2004, which is an update of Appendix A in Fair (2004). No specification changes have been made to the model from the version in Fair (2004). Even though all the NIPA data were revised at the end of 2003, no specification changes to the model seemed to be needed after reestimation. The NIPA tables at the end of this forecast memo are still in the old format (although using the revised data), but Appendix A has been completely updated using the new table formats. 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 2004:2.
Growth Rates (annual rates)
Current
Forecast Actual
Assumptions 2004:2-1993.3
TRGH 8.0 5.0
COG 3.0 3.9
JG 1.0 -1.1
TRGS 8.0 7.3
TRSH 10.0 6.8
COS 3.0 4.9
JS 1.0 1.5
EX 8.0/6.0 5.3
PIM 2.5 0.1
The first seven variables are the main government policy variables in the model aside from tax rates. 8.0/6.0 for EX means an annual growth rate of 8.0 percent for 2004:3-2005:4 and 6.0 percent after that. A key question for the forecast is what to assume about future tax rates. Will the tax cuts be allowed to be phased out, which is currently the law, or will the cuts be made permanent? For this forecast the tax rates in the model have been assumed to be unchanged from their current values. This is a useful base case around which experiments can be made. 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" after "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. Real Growth and the Unemployment Rate: The predicted growth rates for the next four quarters are 3.5, 3.6, 3.3, and 3.2 percent, respectively. These growth rates are high enough to drive the unemployment rate to 5.2 percent by the middle of 2005. The jobs variable, JF, is predicted to increase in the four quarters by 2.5, 2.3, 2.1, and 1.9 percent, respectively. Inflation: Inflation as measured by the growth of the GDP deflator (GDPD) is predicted to be around 3.0 percent for the entire forecast period. Monetary Policy: The estimated interest rate rule (equation 30) is predicting that the three month bill rate (RS) will rise to 2.4 percent by the middle of 2005. It then rises to over 3 percent by 2006. Other Variables: The federal government budget deficit is predicted to be a little over $400 billion in the next four quarters (on a NIPA basis). (See the predicted values for SGP.) This is smaller than many others expect. This is where experimenting may be useful. In particular, it may be that the above assumptions have underestimated future federal government spending. It could also mean, however, that people are too pessimistic about the deficit. The U.S. current account deficit (variable -SR in the model) is forecast to be extremely large throughout the period. It is predicted to rise to over $600 billion in 2005. Possible Experiments to Run As noted above, the current forecast is a good base from which to make alternative assumptions. On the side of stimulus, you can increase government spending. It may be, for example, that COG will grow more rapidly than assumed above, perhaps because of increased defense spending. You can also drop the interest rate rule (equation 30) and put in different values for the bill rate. (Will the Fed tighten more than equation 30 is predicting?) You can also change tax rates, either up or down, from the base case of no change. Regarding prices, you may want to increase PIM if you think there will be an oil price shock or further depreciation of the dollar. The assumption about PIM for the current forecast is that it will grow at an annual rate of 2.5 percent throughout the forecast period. 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 1100. If you think this is too high and that the index will fall to, say, 900, 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, 2004 |
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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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