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Preparing the Modal Forecast for the US Economy

Preparing the Modal Forecast for the US Economy. Richard W. Peach. The views in this presentation are those of the speaker and do not necessarily ...

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Preparing the Modal Forecast for the US Economy

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  1. Preparing the Modal Forecast for the US Economy Richard W. Peach

  2. The views in this presentation are those of the speaker and do not necessarily reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System.

  3. Overview Aggregate Expenditures Adding up the current quarter. Replicating BEA procedures Thinking through the broad outlines over the forecast horizon. Informed judgment Employment Okun’s Law Cyclical and secular trends in population, labor force participation, and average weekly hours. Inflation Inflation expectations augmented Phillips curve.

  4. Income and Expenditures for 2009-Q3 Billions of Current Dollars

  5. Chart 2 Real Personal Consumption Expenditures(Quarterly Percent Change at Annual Rate)

  6. High Frequency Source Data • Motor vehicle sales • Retail Sales • Consumer Price Index • Heating Degree Days • Personal Income

  7. Real PCE: Motor Vehicles and Parts

  8. Real PCE: Non-auto Durables Plus Non-durables

  9. Level of Real Consumer Spending $ Billions, chained 2000 $ Billions, chained 2000 Q4 2005 Q1 2006 Q3 2005 3.9% 4.5% 4.3% -0.5% 1.0% 2.9% Red values are 3-month change at an annualized rate Blue values are change in quarterly average Source: Bureau of Economic Analysis

  10. Chart 3 Real Residential Investment(Quarterly Percent Change at Annual Rate)

  11. High Frequency Source Data • New Residential Construction • Provides data on housing starts, completions, and permits • New Residential Sales • Provides data on volume and prices of new homes sold • Existing Home Sales • Provides data on volume and prices of existing homes sold • Construction Spending • Provides data on nominal construction put in place by type

  12. Inventory Cycle Scenario

  13. Thinking through the broad outlines over the forecast horizon. • Consider past business cycles. • What is the economies potential growth rate. • Stance of fiscal policy • Stance of monetary policy • Financial market conditions • Likely secular trends in the personal saving rate.

  14. GDP Growth by Expenditure Component Over First Four Quarters of Recovery Subtitle Text % Change % Change X-Axis Text Note: Calculated using the average of all post war recoveries * Growth contribution Contact Person Text Source: Bureau of Economic Analysis

  15. BAA Spread (Series Set to 1.0 at NBER Peak) Subtitle Text Y-Axis Left Text Y-Axis Right Text Ratio Ratio Current Cycle 1981 Cycle 1973 Cycle 1990 Cycle 2001 Cycle Jan 6 Months Since NBER Peak Source: Bureau of Labor Statistics Note: Vertical lines represent end of NBER recessions. Contact Person Text

  16. Net Worth over Disposable Personal Income Subtitle Text Percent Percent X-Axis Text Contact Person Text Note: Shading represents NBER recessions. Source: Federal Reserve Board

  17. Okun’s Law Real GDP Growth (%Y) 2.5% Y* 0 Change in Unemployment (U) Note: Y* = Potential GDP Growth Rate.

  18. Labor Force Participation Rate Subtitle Text Percent Percent X-Axis Text Contact Person Text Source: Bureau of Labor Statistics

  19. Average Weekly Hours Subtitle Text Percent Percent X-Axis Text Contact Person Text Source: Bureau of Labor Statistics

  20. Output Gap, Inflation, and Unemployment Subtitle Text Percent Percent Prime Age Male Unemployment Rate Core PCE (4 Qtr % Change) Output Gap X-Axis Text Source: Bureau of Economic Analysis, Bureau of Labor Statistics, and Congressional Budget Office Contact Person Text Note: Shading represents NBER recessions.

  21. Inflation Expectations Augmented Phillips Curve Subtitle Text Inflation Rate Y-Axis Right Text Level of real GDP above Potential Level of real GDP below Potential Slack Matters a Great Deal A Slack Less Important Contact Person Text Full Employment Unemployment Rate (NAIRU) Source Text Note Text

  22. Core CPI Inflation Model • Dependent Variable: Quarterly change in core CPI inflation growth. (Δπt = πt – πt-1) • Independent Variables: • Two lags of the change in core CPI inflation. • Δπt-1, Δπt-2, • One lag of the PAM unemployment rate. • Profit Margin • One lag of inflation expectations. • Unemp Ratet-1 • Two lags of the relative import price. • Rel Imp Pricet-2 = Import Price Inflationt-2 – πt-2

  23. Core CPI Model R-squared: 0.78 Estimated from 1980Q1 through 2009 Q1

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