| US Forecast: February 5, 2009 |
| Forecast Period 2009:1--2012:4 (16 quarters) Data The forecast is based on the national income and product accounts (NIPA) data that were released on January 30, 2009. The Latest Version of the US Model For purposes of this forecast the US model has been reestimated through 2008:4. These estimates and the complete specification of the model are presented in Appendix A: The US Model: February 5, 2009, which is an update of Appendix A in Fair (2004). Beginning with the forecast dated October 31, 2005, a few minor specification changes have been made to the model from the version in Fair (2004). These are explained in Changes to the US Model Since 2004. Assumptions Behind the Forecast At the time of this writing the stimulus bill is being debated in the Congress. The final bill is not yet known. The way I have handled this is to present a "baseline" forecast assuming no stimulus bill and then discuss ways in which the assumptions behind this forecast might be modified to account for various stimulus measures. The baseline assumptions are as follows. The table below gives the growth rates that were assumed for the baseline forecast for the key exogenous variables in the model along with the actual growth rates between 1993:3 and 2008:4.
Growth Rates (annual rates)
Baseline
Forecast Actual
Assumptions 2008:4-1993.3
TRGH 6.0 5.9
COG 2.0 4.0
JG 0.0 -0.7
TRGS 5.0 6.0
TRSH 2.0 5.6
COS -3.0/1.0 3.6
JS -2.0/0.0 1.4
EX -4.0/3.0/7.0 5.6
PIM 2.0 1.3
The first seven variables are the main government policy variables in the model aside from tax rates. TRGH is nominal federal government transfer payments to households, COG is real federal government purchases of goods, JG is federal government civilian employment, TRGS is nominal federal government transfer payments to state and local governments, TRSH is nominal state and local government transfer payments to households, COS is real state and local government purchases of goods, JS is state and local government employment, EX is real exports, and PIM is the import price deflator. -3.0/1.0 for COS means that COS was assumed to fall at a 3 percent annual rate for the first four quarters, 2009:1--2009:4, and then to grow at an annual rate of 1.0 percent after that. -2.0/0.0 for JS means that JS was assumed to fall at an annual rate of 2.0 percent for the first four quarters and then to remain unchanged after that. -4.0/3.0/7.0 for EX means that EX was assumed to fall at an annual rate of 4.0 percent for the first four quarters, then to grow at an annual rate of 3.0 percent for the next four, 2010:1--2010:4, and then to grow at an annual rate of 7.0 percent after that. All tax rates for the baseline forecast were taken to remain unchanged from their 2008:4 values. The above assumptions have state and local governments contracting some for 2009 and then returning to normal. For the federal government everything is business as usual---no stimulus, etc. Again, this is for the baseline forecast. Exports are assumed to fall in 2009 and then begin growing again in 2010. 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 Baseline Forecast Selected forecast results are present in Tables F1 through F4. If you want more detail, click "Solve current version" 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 GDP Growth and the Unemployment Rate: The baseline forecast has real GDP falling by 1.8 percent in 2009:1 and 0.3 percent in 2009:2. (All growth rates in this memo are at annual rates.) It then grows at 0.6 percent in 2009:3 and 1.2 percent in 2009:4. It then picks up in 2010. The unemployment rate rises to 8.8 percent by 2009:4 and then begins falling. It is 6.7 percent in 2012:4. The jobs variable, JF, shows jobs falling by 1.894 million in 2009. Inflation: Inflation as measured by the growth of the GDP deflator (GDPD) is predicted to be about 2.5 percent for the next two years. The model, however, has been overpredicting inflation for the past few quarters, and so the current predictions should be interpreted with some caution. (For the past forecasting record of the model, see The Forecasting Record of the US Model.) Monetary Policy: The estimated interest rate rule (equation 30) is predicting that the three month bill rate (RS) will be essentially zero in the next two years. It then rises gradually to 1.8 percent by the end of 2012. Other Variables: The federal government budget deficit, variable SGP, is predicted to be between $500 and $600 billion for the next four years. This leads the federal government debt, variable AG, to be $8.737 trillion by the end of 2012, which compares to $5.779 trillion at the end of 2008. Interest payments of the federal government, variable INTG, rise from $58.7 billion at the end of 2008 to $101.5 billion at the end of 2012. The U.S. current account deficit, variable SR, is forecast to be between about $550 and $700 billion in the next two years. Comments on the Baseline Forecast and Possible Experiments to Run One of the reasons the model is predicting negative growth in the first half of 2009 is the negative wealth effect from the fall in stock prices and housing prices. There is also a large inventory correction predicted for 2009:1 because of past inventory buildups. Why is the economy predicted to be no worse? Why no predicted huge decreases in GDP and increases in the unemployment rate? The answer is roughly as follows. There are two equations in the model that have large negative residuals for the last two quarters, 2008:3 and 2008:4, the nondurable consumption (CN) equation and the durable consumption equation (CD). Otherwise, the residuals for the other 28 equations are all within what would appear normal. The error terms in the CN and CD equations are not assumed to be serially correlated, and so when a forecast is made, the future residuals are set to zero. In the model the error terms are random shocks with means zero, and so zero is used for the future values. In order for the model to predict a much worse economy, one would have to put in some large future negative shocks, like the observed shocks to the CN and CD equations in the last two quarters, which has not been done. It may be, of course, that there will be large negative shocks, due, say, to financial issues that are not in the model. The model, for example, does not account for possible credit rationing on consumers and investors from the financial distress. If there are large future negative shocks, the current baseline forecast will turn out to be too optimistic. If you have views about the size of possible shocks to some of the equations, you can put these shocks into the model and examine the results. The following are other experiments that might also be of interest. Regarding inflation, you may want to increase PIM if you think oil prices will begin to rise again or the dollar to depreciate. The assumption about PIM for the current forecast is that it will grow at an annual rate of 2.0 percent throughout the forecast period, which may be low. If you increase PIM, inflation will, of course, be higher than is currently forecast. If you think housing prices will fall further, you can decrease PSI5, which will lower PIH relative to PD. This will affect consumption through the wealth variable AA (equation 89 and equations 1, 2, and 3). Regarding the stock market, 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 870. If you think that the index will fall, say, 100 points, you should drop the equation for CG and change CG by about -$1,000 billion at a quarterly rate (-$4,000 billion at an annual rate). See the discussion in Section 7.2 of The US Model Workbook. This will have a negative effect on real output growth because of a negative wealth effect. A Stimulus Experiment (STIMUL1 with password of BASE) The Congressional Budget Office (CBO) issued a report on January 27, 2009, which discussed the stimulus bill that had been passed by the House of Representivies. The numbers that I have used for the present experiment are based (roughly) on the numbers in this report. The stimulus bill has tax cuts, transfer payment increases, and increases in government purchases of goods and services. Some of the transfers are to state and local governments and some are directly to households. In the US model is makes no difference whether the federal government makes transfer payments directly to households (variable TRGH) or makes them to state and local governments (variable TRGS) if the state and local governments in turn pass on the transfer payments to households (variable TRSH). To keep matters simple in the present experiment, all transfer payment increases are put into TRGH. Again, it would not matter if instead TRGS was increased and then TRSH increased by the same amount. In addition, tax cuts are taken to be increases in TRGH rather than decreases in the personal income tax rate D1G. Most of the tax cuts do not involve cutting tax rates, and so it seems better to put them in TRGH. All increases in purchases of goods and services are put in COG, federal government purchases of goods. Therefore, only two variables are changed for the stimulus experiment, TRGH and COG. The timing of expenditures is a major issue in trying to capture the effects of any stimulus package. I have roughly followed the CBO timing for the present experiment. I have assumed that TRGH is $165 billion larger in fiscal 2009, $310 billion larger in fiscal 2010, $130 billion larger in fiscal 2011, $56 billion larger in fiscal 2012, and $52 billion larger (at an annual rate) in 2012:4. I have roughly spread these increases evenly within the four quarters of the fiscal year. For nominal government spending on goods (PG*COG) I have assumed it to be $20 billion larger at an annual rate in 2009:3, $46 billion larger in fiscal 2010, $43 billion larger is fiscal 2011, $36 billion larger at an annual rate in 2011:4, and the same as the baseline after that. No changes in COG have been made in 2009:1 and 2009:2. To get the increases for COG, which is in real terms, I have divided the above increases by predicted values of PG from the baseline forecast. The total nominal increase over the four-year period of the forecast is $775 billion, of which $675 billion is in transfer payments and $100 billion is in purchases of goods. The data set that contains this experiment is called STIMUL1 with a password of BASE, and you can examine this data set on the site. In particular, you can compare the predictions in STIMUL1 to the predictions in data set BASE (the baseline forecast) to see the effects of the changes. At the end of this memo is a list of some of the results for this experiment from the site. It is important to note that one can have more confidince in the differences in the predictions between STIMUL1 and BASE than in, say, the predictions in BASE. It could be, for example, as discussed above, that the baseline forecast is too optimistic---that some of the residuals that have been set to zero will in fact turn out to be negative and large in absolute value. However, this kind of error affects both the predictions in BASE and those in STIMUL1, so they cancel out when looking at differences. Put another way, estimated standard errors of multipliers are usually much smaller than estimated standard errors of forecasts. The output below presents some of the main variables in the model. Presented first are TRGH and COG to see the exact changes that were made. These two variables are, of course, exogenous. Presented next is real GDP and its percentage change (GDPR and PCGDPR). The peak difference in GDPR is in 2010:3, $368 billion or 3.1 percent of the baseline value. Between 2009:2 and 2010:1 the growth rates are between 2.2 and 3.7 percentage points larger. Presented next are the unemployment rate and the jobs variable (UR and JF). The peak difference is in 2010:3, where the unemployment rate is 1.6 percentage points lower. The peak difference in jobs is in 2010:4 at 3.52 million jobs. Presented next are the GDP deflator and its percentage change (GDPD and PCGDPD). The largest difference in the inflation rate is in 2010:4, where PCGDPD is 0.81 percentage points higher. Presented next are the federal government deficit (SGP) and the federal government debt (AG). The deficit difference peaks at $314 billion in 2009:3. The debt by the end of 2012 is $608 billion larger. This increase is less than the $775 billion stimulus increase because of the increased tax collections. Offsetting this somewhat is that fact that interest payments of the federal government are larger. The short term interest rate (RS) and federal government interest payments (INTG) are present next (and last). Interest payments are $45 billion larger by the end of 2012. The short term interest rate, RS, has a peak difference of 1.3 percentage points in 2010:4. The Fed is predicted to raise interest rates somewhat in the more expansive economy. An interesting feature of the results is that in 2011 and 2012 real GDP growth rates are larger in the baseline case than in the stimulus case. As the stimulus measures wear down, the growth of the economy is negatively affected. There are also in the stimulus case in 2011 and 2012 negative stock effects (durable stock, housing stock, and capital stock), negative effects from the higher price level, and negative effects from higher interest rates, which are the result of the more expansionary economy in 2009 and 2010. By the end of 2012 the number of jobs (JF) is slightly lower in the stimulus case than in the baseline case. Other Stimulus Experiments to Run
As more details of the stimulus plan come out, it is easy to run alternative experiments on the site. The simplest thing to do, as discussed above, is to put all the changes in TRGH and COG. Remember that TRGH is in nominal terms and COG is in real terms. There are also two other changes that might be of interest to make. One is to raise tax rates in 2011 and 2012, say the federal personal income tax rate D1G. There is current discussion that some taxes will have to be raised in 2011 and 2012 to keep the federal government deficit under control Another change is to try to account for the bailout bill. If, say, the various bailouts result in a loss of $200 billion to the federal government, this is probably best accounted for by changing exogenous variable TRFG in the model. TRFG is the level of transfer payments from firms to the federal government. In 2008:4 this level was $37.4 billion at an annual rate, and it has been assumed to remain at this level throughout the forecast period. If there is a $200 billion loss, say spread evenly throughout 2010, then TRFG for each quarter of 2010 should be changed to -162.6, which is 37.4 less 200.0. The federal government loss is essentially a negative tax to corporations, which can be accounted for by changing TRFG. Decreasing TRFG increases cororate profits, which increases dividends, which increases household disposable income. This effect is, however, quite modest in the model because dividends respond slowly to profit changes. If you run this experiment you will see that it has a modest effect on real GDP. It mostly just increases the federal government deficit in 2010 (variable SGP) and the federal government debt (variable AG) from 2010 on. Federal intestest payments are larger from 2010 on because of the larger federal debt. |
| The US Model | Home | Output | Tables |
Dataset: STIMUL1
Comparison dataset: BASE
| Qtr | TRGH | COG | ||||
|---|---|---|---|---|---|---|
| STIMUL1 | BASE | 1 - 2 | STIMUL1 | BASE | 1 - 2 | |
| 20081 20082 20083 20084 20091 20092 20093 20094 20101 20102 20103 20104 20111 20112 20113 20114 20121 20122 20123 20124 | 1284 1620.8 1411.6 1385.2 1405.5262 1746.15 1787.08 1780.37 1801.86 1819.72 1841.92 1688.41 1711.28 1734.42 1753.9399 1705.8 1730 1754.5699 1779.49 1800.78 |
1284 1620.8 1411.6 1385.2 1405.5262 1426.1506 1447.0778 1468.312 1489.8578 1511.7197 1533.9025 1556.4108 1579.2493 1602.4229 1625.9366 1649.7954 1674.0042 1698.5682 1723.4928 1748.7831 |
0 0 0 0 0 319.99939 340.0022 312.05798 312.0022 308.00024 308.01758 131.99927 132.03076 131.99719 128.0033 56.004639 55.99585 56.001709 55.997192 51.996948 |
427.60001 436.29999 456.10001 461.89999 464.19238 466.49612 484.57001 502.38 511 513.03003 515.10999 517.20001 519.31 521.41998 508.63 507.81 492.60468 495.04944 497.50632 499.97543 |
427.60001 436.29999 456.10001 461.89999 464.19238 466.49612 468.81131 471.138 473.47623 475.82605 478.18756 480.56076 482.94574 485.34259 487.75131 490.17197 492.60468 495.04944 497.50632 499.97543 |
0 0 0 0 0 0 15.758698 31.242004 37.523773 37.203979 36.922424 36.639252 36.364258 36.077393 20.878693 17.638031 0 0 0 0 |
| Qtr | GDPR | PCGDPR | ||||
|---|---|---|---|---|---|---|
| STIMUL1 | BASE | 1 - 2 | STIMUL1 | BASE | 1 - 2 | |
| 20081 20082 20083 20084 20091 20092 20093 20094 20101 20102 20103 20104 20111 20112 20113 20114 20121 20122 20123 20124 | 11646 11727.4 11712.4 11599.4 11548.159 11609.886 11731.689 11860.264 12006.443 12141.974 12256.416 12311.366 12356.981 12404.376 12438.198 12466.826 12486.727 12528.25 12585.854 12653.954 |
11646 11727.4 11712.4 11599.4 11548.158 11538.298 11554.131 11588.315 11669.761 11775.918 11888.219 11997.277 12113.353 12226.683 12332.253 12429.19 12517.958 12599.739 12676.167 12748.925 |
0 0 0 0 0.0009765 71.587891 177.55859 271.94824 336.68262 366.05566 368.19727 314.08887 243.62891 177.69336 105.94531 37.635742 -31.23144 -71.48925 -90.31347 -94.97070 |
0.8737078 2.8252587 -0.510641 -3.803667 -1.755355 2.1552608 4.2630563 4.4564214 5.0219622 4.5922813 3.8237791 1.8054494 1.4903098 1.5430273 1.0951248 0.9238289 0.6400375 1.3368121 1.8518792 2.1819835 |
0.8737078 2.8252587 -0.510641 -3.803667 -1.755385 -0.341101 0.5500230 1.1887131 2.8410654 3.6886609 3.8695061 3.7202766 3.9265752 3.7951658 3.4987748 3.1814673 2.8874798 2.638979 2.4484828 2.3157511 |
0 0 0 0 3.015e-5 2.4963624 3.7130333 3.2677083 2.1808968 0.9036204 -0.045727 -1.914827 -2.436265 -2.252138 -2.403649 -2.257638 -2.247442 -1.302166 -0.596603 -0.133767 |
| Qtr | UR | JF | ||||
|---|---|---|---|---|---|---|
| STIMUL1 | BASE | 1 - 2 | STIMUL1 | BASE | 1 - 2 | |
| 20081 20082 20083 20084 20091 20092 20093 20094 20101 20102 20103 20104 20111 20112 20113 20114 20121 20122 20123 20124 | 0.0494305 0.0537397 0.0604634 0.0685535 0.0779071 0.0818676 0.0816798 0.0791459 0.0746950 0.0699765 0.0657952 0.0633545 0.0623811 0.0623999 0.0633556 0.0650176 0.0672823 0.0694848 0.0713056 0.0726733 |
0.0494305 0.0537397 0.0604634 0.0685535 0.0779072 0.0833303 0.0862271 0.0875346 0.0867138 0.0846944 0.0820086 0.0791580 0.0762345 0.0734627 0.0710636 0.0691727 0.0678431 0.0670626 0.0667714 0.0668821 |
0 0 0 0 -8.940e-8 -0.001462 -0.004547 -0.008388 -0.012018 -0.014717 -0.016213 -0.015803 -0.013853 -0.011062 -0.007708 -0.004155 -0.000560 0.0024222 0.0045342 0.0057912 |
131.625 131.537 130.98 129.136 128.03416 127.70692 128.03357 128.77443 129.79863 130.94821 132.08464 132.98412 133.66283 134.17526 134.51141 134.69562 134.73538 134.74081 134.77321 134.85513 |
131.625 131.537 130.98 129.136 128.03415 127.45352 127.22733 127.24187 127.52192 128.03697 128.71098 129.46484 130.28259 131.12318 131.94299 132.71005 133.40462 134.01791 134.55016 135.008 |
0 0 0 0 1.5258e-5 0.2534027 0.8062439 1.5325546 2.2767105 2.9112396 3.3736572 3.5192719 3.3802338 3.0520782 2.5684204 1.9855652 1.3307648 0.7229003 0.2230529 -0.152862 |
| Qtr | GDPD | PCGDPD | ||||
|---|---|---|---|---|---|---|
| STIMUL1 | BASE | 1 - 2 | STIMUL1 | BASE | 1 - 2 | |
| 20081 20082 20083 20084 20091 20092 20093 20094 20101 20102 20103 20104 20111 20112 20113 20114 20121 20122 20123 20124 | 1.2159779 1.2188891 1.2305591 1.2312793 1.239077 1.2461959 1.2543758 1.2633346 1.2726729 1.2829651 1.2940192 1.3057216 1.3169701 1.3282233 1.3394378 1.3502464 1.3605988 1.3703389 1.3798593 1.3892241 |
1.2159779 1.2188891 1.2305591 1.2312793 1.239077 1.2464669 1.2538595 1.2610803 1.268154 1.2759026 1.2843657 1.2934338 1.302848 1.3129213 1.3234987 1.3344315 1.345605 1.3569088 1.3682429 1.3795274 |
0 0 0 0 0 -0.000270 0.0005162 0.0022543 0.0045188 0.0070624 0.0096535 0.0122878 0.0141221 0.0153020 0.0159391 0.0158149 0.0149937 0.0134301 0.0116164 0.0096966 |
2.5981936 0.9610962 3.8850582 0.2342905 2.5573747 2.3180244 2.6515234 2.8875718 2.9896464 3.2742732 3.4912395 3.6667533 3.4906859 3.4619756 3.420306 3.2670786 3.1022606 2.8943739 2.8080897 2.7424505 |
2.5981936 0.9610962 3.8850582 0.2342905 2.5573974 2.4070213 2.3935611 2.3234959 2.2626591 2.4665711 2.6796958 2.8542161 2.9432971 3.1287799 3.2616856 3.3453922 3.3916013 3.4027922 3.3832328 3.3400297 |
0 0 0 0 -2.264e-5 -0.088996 0.2579622 0.5640759 0.7269873 0.8077020 0.8115437 0.8125371 0.5473887 0.3331956 0.1586203 -0.078313 -0.289340 -0.508418 -0.575143 -0.597579 |
| Qtr | SGP | AG | ||||
|---|---|---|---|---|---|---|
| STIMUL1 | BASE | 1 - 2 | STIMUL1 | BASE | 1 - 2 | |
| 20081 20082 20083 20084 20091 20092 20093 20094 20101 20102 20103 20104 20111 20112 20113 20114 20121 20122 20123 20124 | -330.7999 -649.7000 -547.5999 -468.6276 -525.7600 -862.5290 -896.9116 -876.5786 -865.6967 -842.3942 -827.3635 -651.0146 -656.2456 -662.1699 -649.0666 -586.5583 -580.7253 -594.0434 -602.2961 -603.0629 |
-330.7999 -649.7000 -547.5999 -468.6276 -525.7604 -558.7882 -582.6726 -600.6149 -604.7639 -599.2719 -589.4464 -578.5365 -564.3579 -549.1118 -534.8915 -522.5844 -512.5253 -504.7364 -498.9974 -494.9542 |
0 0 0 0 0.0004272 -303.7408 -314.2390 -275.9636 -260.9328 -243.1223 -237.9171 -72.47808 -91.88763 -113.0581 -114.1751 -63.97387 -68.19995 -89.30703 -103.2986 -108.1087 |
-5409.193 -5592.804 -5628.673 -5779.056 -5952.287 -6214.85 -6486.54 -6753.597 -7018.284 -7277.366 -7532.572 -7743.391 -7954.938 -8167.446 -8376.264 -8569.027 -8759.912 -8953.658 -9149.198 -9344.727 |
-5409.193 -5592.804 -5628.673 -5779.056 -5952.286 -6139.342 -6333.075 -6531.519 -6730.717 -6928.409 -7123.694 -7316.261 -7505.140 -7690.030 -7871.156 -8048.939 -8223.883 -8396.521 -8567.350 -8736.79 |
0 0 0 0 -0.000976 -75.51171 -153.4653 -222.0776 -287.5668 -348.9575 -408.8779 -427.1298 -449.7983 -477.4160 -505.1079 -520.0878 -536.0283 -557.1367 -581.8476 -607.9365 |
| Qtr | RS | INTG | ||||
|---|---|---|---|---|---|---|
| STIMUL1 | BASE | 1 - 2 | STIMUL1 | BASE | 1 - 2 | |
| 20081 20082 20083 20084 20091 20092 20093 20094 20101 20102 20103 20104 20111 20112 20113 20114 20121 20122 20123 20124 | 2.0433333 1.6266667 1.4933333 0.2966666 0 0 0.0749170 0.2930617 0.7181457 1.2087131 1.6312782 1.8839875 1.9916648 2.0301511 2.0072224 1.9122076 1.7465013 1.5699925 1.4310703 1.3324819 |
2.0433333 1.6266667 1.4933333 0.2966666 0 0 0 0 0 0.0926736 0.2977979 0.5437748 0.7922200 1.0385814 1.2706265 1.469009 1.6224344 1.7303154 1.7969869 1.8278233 |
0 0 0 0 0 0 0.0749170 0.2930617 0.7181457 1.1160394 1.3334802 1.3402127 1.1994447 0.9915697 0.7365958 0.4431985 0.1240669 -0.160322 -0.365916 -0.495341 |
307.70001 280.39999 320.20001 234.89999 247.0004 262.72089 278.74207 294.62579 310.69757 326.81705 342.94016 356.88654 370.54758 383.9332 396.82712 408.58826 419.7847 430.61841 441.05954 451.06732 |
307.70001 280.39999 320.20001 234.89999 247.00041 259.52747 272.05533 284.49036 296.60318 308.28229 319.55124 330.34198 340.65802 350.57162 360.18036 369.56387 378.78433 387.88452 396.8873 405.80112 |
0 0 0 0 -1.525e-5 3.1934204 6.6867371 10.135437 14.094391 18.53476 23.388916 26.544556 29.889557 33.361572 36.646759 39.024384 41.000366 42.733887 44.172241 45.266205 |