Economic Indicator Forecast

Economic Indicator Forecast

An economic indicator is a statistic of the current status of the economy. This can predict how the economy may perform in the future. Investors and other private or government organizations use this information as a tool to make business decisions. By gathering historical data about the economy and comparing it to current trends, one can compile a snapshot of economic fluctuations. The direction of an indicator may vary according to changes in the economy. The indicator can be leading, lagging, or coincident. Leading indicators are changes before the economy has recognized the changed. Lagging indicators do not change until a few quarters after the economy has change. Coincident indicators move at the same time as the economy (The Library of Congress, 2005). Some of the common indicators are GDP, Unemployment Rate, Inflation Rate, Capacity utilization, Auto sales, and Personal income. As the explanation of these six indicators will be use to forecast the future of the economy, the trend of these indicators will also be used to evaluate the economy's historical and future outcome.

Inflation Rate

The Congressional Budget Office (CBO) projects that inflation, as measured by the year-to-year change in the consumer price index for all urban consumers (CPI-U), is projected to decline from 2.8% this year to 2.3% next year. Rates of inflation for food and energy prices, which increased during the first half of this year are expected to be moderate. This should keeping overall inflation lower than in the recent past. In addition, the underlying rate of consumer price inflation is expected to be relatively stable, averaging slightly above 2% over the next year and a half (Congressional Budget Office [CBO], 2007).

Oct

2007 Nov

2007 Dec

2007 Jan

2008 Feb

2008 Mar

2008

Forecast Value 2.30 2.13 1.89 1.88 1.79 2.01

Inflation rate in the U.S. economy will decelerate in 2007 and hold nearly steady over the following two years, according to 49 forecasters surveyed by the Federal Reserve Bank of Philadelphia. Measured on a fourth-quarter over fourth-quarter basis, inflation rate will fall to 2.3% this year and hold steady at that rate in 2008 and 2009. An alternative measure of core inflation, the rate of change in the price index for personal consumption expenditures (PCE), is also expected to decelerate, to 2.0%, in 2007 before rising to 2.1% in 2009. Core inflation measures the rate of change in a price index that excludes the prices of food and energy. This is the first Survey of Professional Forecasters to report projections for core inflation (Federal Reserve Bank of Philadelphia, 2007).

Oct

2007 Nov

2007 Dec

2007 Jan

2008 Feb

2008 Mar

2008

Forecast Value 2.30 2.13 2.02 2.10 1.89 2.05

The actual rate of inflation has fluctuated greatly over the last half century, ranging from nearly zero inflation to 23% inflation. However, the Board of Governors that oversee the Federal Reserve Banks, the Fed, actively strive to maintain a specific rate of inflation which is typically between two and three percent (United States Department of Labor, 2006). The fear of inflation precludes government from expanding the economy, reducing unemployment and lower interest rates (Colander, 2004, 584). Although the economic outlook has been clouded by recent problems in the housing market and disruptions in financial markets, the most likely scenario is that economic performance will remain sound according the above sources.

Capacity Utilization

The degree to which the manufacturing sector may be pushing up against output constraints, measured as the capacity utilization rate for manufacturing, indicates that capacity in the sector is not strained enough to increase inflation. After rising to 80.9% in August 2006, capacity utilization eased back to about 80% during the recent slowdown. In general, the capacity utilization rate has to reach at least 83% before it exerts an upward push on inflation (United States Department of Labor, 2006). According to the National Center for Policy

Analysis, utilization rates will increase slowly through mid-2008 as manufacturers respond to increased device demand.

Oct

2007 Nov

2007 Dec

2007 Jan

2008 Feb

2008 Mar

2008

Forecast Value 78.5% 77.8% 78.9% 79.2% 79.5% 80.3%

(National Center for Policy Analysis, 2007)

According to the Federal Reserve Board Capacity utilization for total industry was unchanged in month of October and expected to increase in the next six months. Utilization rates bottomed in the first quarter of 2007 as FED adjusted production to compensate for inventories and seasonal demand (The Federal Reserve Board, 2007)

Oct

2007 Nov

2007 Dec

2007 Jan

2008 Feb

2008 Mar

2008

Forecast Value 78.5% 77.8% 80.9% 79.5% 79.8% 80.8%

In addition to production, this monthly report also provides a measure of capacity utilization. Though the rate of capacity utilization is seen as a critical gauge of the slack available in the economy, the market does not completely trust this measure. Capacity is very difficult to measure, and the Fed essentially assumes that growth in capacity in any given year follows a straight line. One can therefore predict the capacity utilization rate quite accurately based on the assumption for production growth (Briefing.com, 2007).

GDP

When researching for GDP estimates