| US Forecast: November 5, 1999 |
| Forecast Period 1999:4--2004:4 (21 quarters) Data The forecast is based on the national income and product accounts (NIPA) data that were released on October 28, 1999. The Latest Version of the US Model For purposes of this forecast the US model has been reestimated through 1999:3. 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. The NIPA data have been revised back to 1959, and the revised data have been used. When necessary, data prior to 1959 were spliced to the new data. A few specification changes were made in the process of updating the model. The following is a list of the changes that have been made from the November 3, 1998, version.
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 1999:3.
Growth Rates (annual rates)
Current Clinton Actual
Forecast Plan 1999:3-1993.3
TRGH 5.0/8.0 4.3 4.2
COG 2.0 -4.8 0.3
JG -1.0 -4.8 -1.5
TRGS 5.8/8.0 5.8 5.7
TRSH 6.0 6.0 5.6
COS 3.0 1.0 5.7
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 between about $160 and $230 billion throughout the forecast period. (Remember, this is with no tax cuts and no unusual government expenditure increases.) 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 5.6 percent by the beginning of 2001. The Results The current forecasts for real growth (at an annual rate) in the next four quarters are 3.7, 3.1, 3.3, and 3.2 percent, respectively. The growth rate then falls to 2.7 percent by the end of 2001 and remains roughly at this value throughout the rest of the forecast period. The unemployment rate falls to 3.7 percent by the end of 2000 and then begins to rise slightly. The inflation rate as measured by the growth of the GDP deflator (GDPD) is 2.8 percent for the next five quarters and then begins to fall slightly. The household saving rate (variable SRZ in the model) is forecast to fall to 0.8 by the beginning of 2001. The U.S. current account deficit (variable -SR in the model) is large throughout the period. 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 2004:4, 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 rosy government budget picture. For example, there is currently considerable uncertainty about possible future tax cuts, and you can experiment with alternative tax-cut plans. 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. 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 what is happening in the economy? The model is predicting a fairly large increase in the rate of inflation (for the GDP deflator, from about 1.5 percent in the last four quarters to 2.8 percent in the next four), and you may want to experiment with the price equation (equation 10). The price equation may be overpredicting the price level, although note that the unemployment rate enters the equation only linearly and so there is no nonlinear response going on here. At some point one would expect to see large (i.e., nonlinear) price 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. So it could be that inflation will be even worse in the future than the model is predicting if the economy is close to the point where the price response is nonlinear. Finally, if you think the stock market might crash, you can, as explained in The US Model Workbook, put a crash in the model and examine the economic effects. One of the reasons the model is predicting a fairly good growth rate in the next year is because of the positive wealth effect on consumption due to the past boom in the stock market. Maybe the high level of stock prices won't last? |
| US Forecast Tables: November 5, 1999 |
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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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