US Forecast: May 1, 1999 |
Forecast Period 1999:2--2003:4 (19 quarters) Data The forecast is based on the national income and product accounts (NIPA) data that were released on April 30, 1999. The Latest Version of the US Model For purposes of this forecast the US model has been reestimated through 1999:1. 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 November 3, 1998, version of the US model is in Macroeconometric Modeling, which is the main reference for this site. There are two specification changes for the latest version of the US model from the November 3, 1998, version. The first change, which also pertains to the January 30, 1999, version, is that the interest rate variable has been dropped from the fixed investment equation, equation 12. I have been unable to find significant cost of capital effects in the investment equation, and the (insignificant) interest rate variable that I had been using in this equation now has a coefficient estimate of the wrong sign. Alas. The second change, which pertains only to the latest version, is that the lagged value of the asset variable, AA/POP, has been added to the durable expenditures equation, equation 3. It now appears possible to pick up a wealth effect on durable expenditures. See Model Versions and References for more discussion of the model versions. Assumptions Behind the Forecast Included on this site is an analysis of three economic plans that I did on September 4, 1996: An Analysis of the Clinton and Dole Economic Plans. The three plans were the latest (at the time) Congressional plan, the Clinton plan, and the Dole plan. The budget agreement that was eventually worked out by the Democrats and Republicans was closest to the original Clinton plan, although the spending cuts were not as large as the originally planned cuts. The following table gives for the key government policy variables in the model 1) the growth rates used for the current forecast, 2) the growth rates I used in analyzing the original Clinton plan, and 3) the actual growth rates between 1993:3 and 1999:1. Growth Rates (annual rates) Current Clinton Actual Forecast Plan 1999:1-1993.3 TRGH 5.0/8.0 4.3 4.4 COG 2.0 -4.8 -0.4 JG -1.0 -4.8 -1.3 TRGS 5.8/8.0 5.8 4.6 TRSH 6.0 6.0 6.7 COS 3.0 1.0 4.3 JS 1.0 1.0 1.6 Notes: 5.0/8.0 means 5.0% through 2000.4 and 8.0% thereafter. 5.8/8.0 means 5.8% through 2000.4 and 8.0% thereafter. All tax rates are assumed to remain unchanged for the current forecast. It may help you to review the analysis of the Congressional and Clinton plans on the site to put the current assumptions in perspective, although this material is now somewhat dated. If you examine the federal government surplus variable (SGP), you can see that the current fiscal-policy assumptions result in a surplus of around $100 billion per year for the next three years and the slightly less that this per year for the remaining forecast period. The predicted value of SGP begins at $106.1 billion in 1999:2 and ends at $51.6 billion in 2003:4. This projected surplus is less than the current CBO projected surplus. No assumption about monetary policy is needed for the forecast because monetary policy is endogenous (equation 30, the interest rate reaction function). As can be seen from the second page of Table F1, the model is predicting the bill rate to rise to 5.1 percent by the end of 1999 and to 5.6 percent by the end of 2000. The Results The current forecasts for real growth (at an annual rate) in the three remaining quarters of 1999 are 4.1, 3.0, and 2.2 percent, respectively. The growth rate is predicted to be about 2.6 percent for 2000. The unemployment rate remains low for the next few years. The inflation rate as measured by the growth of the GDP price index (GDPD) gradually rises to 2.0 percent by the end of 2000. The household savings rate (variable SRZ in the model) is forecast to be negative throughout the period. The U.S. current account deficit (variable -SR in the model) is large and growing. You can examine the tables of this forecast memo for the details, or you can print out the forecast values from the base data set for the model. Although the model is used to forecast through 2003:4, you should not put much confidence on the results beyond about 2001. Forecast error bands are fairly large for predictions this far ahead. Possible Experiments to Run The present forecast is a good base from which to make alternative fiscal-policy assumptions, depending on what you think Congress might do in light of the fairly rosy budget picture. As a historical footnote, the model has consistently been more optimistic about the size of future federal government deficits than have most others, especially regarding future tax revenues, and the recent data suggest that the model has been right. The CBO and others have now moved in the optimistic direction. You may want to compare the current CBO forecasts with those from the model. My sense is that the model has conveyed useful information in the past about the deficit that was not in the CBO forecasts at the time. As noted above, it is now the case that the model is less optimistic than is CBO regarding future federal budget values. You may also want to drop the interest rate reaction function (equation 30) and put in your own assumptions about Fed behavior. For example, do you think the Fed will raise interest rates more than the model predicts it will in response to the strong 1998:4 and 1999:1 numbers and the booming stock market? You may want to modify the price equation (equation 10) to have it predict higher price levels. At some point one would expect to see large price level increases in response to a falling unemployment rate. Unfortunately, there are not enough observations at low unemployment rates for the data to estimate this point precisely. It may be that there is not enough nonlinearity in equation 10 as it is estimated and thus that it is too optimistic about the future price path. |
US Forecast Tables: May 1, 1999 |
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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