Macroeconomic Forecast

Macroeconomic Forecast

Mercedes Martishius

ECO553

September 15, 2004

Abstract

Since the middle of 2000, our economy has had many challenges: equity prices have declined, capital spending has fallen, the terrorists' attacks of September 11, Corporations such as Enron have shown their ugly sides, and wars in Afghanistan and Iraq. Had any combination of these events happened two or three decades ago our economy would have suffered a serious contraction. Remarkably, over the past three years, activity has expanded, offering clear evidence of a flexible, more resilient, economic system. The following paper will attempt to prove just how resilient our economy is by focusing on four economic indicators; Employment Growth, Interest Rates, Retail Sales and Inflation.

Macroeconomics Forecast

Employment Growth

The Bureau of Labor Statistics (BLS) and the U.S. Department of Labor has compiled a 10-year projection of economic growth. These statistics are widely used in career guidance, education planning and training programs, but mainly to study long-range employment trends. Covering the 2002-12 decade, these projections reflect the 2000 Standard Occupational Classification (SOC) system and the 2002 North American Industry Classification System (NAICS).

Over the previous decade (1992-2002), total employment grew by 20.7 million jobs but at a slightly faster rate, 17 percent. ftp://ftp.bls.gov/pub/news.release/History/ecopro.082498.news table 1

Based on reports from the Department of Labor's Current Population Survey, more than 139 million Americans are currently employed and the Bureau of Labor Statistics is predicting that over the 2002-2012 decade that employment will continue to increase by more than 21.3 million jobs or 15%. http://www.osec.doc.gov/obl/OBL-EconomicBrief.pdf, http://www.cbo.gov/Spreadsheet/4985_TableE-1.xls

Our nation has added new jobs every month for the past year with a total of 1.7 million jobs. More Americans are working today than at any other time in our nation's history. People's pay-checks are getting bigger. Take-home pay increased by 3.6 percent last year - faster than the averages of the 1980s and 1990s. The U.S. economy is the fastest growing major industrialized economy in the world. The U.S. economy has grown at an annual rate of 5.4% over the past three quarters, the fastest pace of growth since 1984. http://www.commerce.gov

Historical Data

If current trends are maintained, the employment prospect for 2010 does not look bright.

With labor force being projected to grow at 1.4 % per annum during the first decade of the 21st

Century, the unemployment rate would rise to 7 % and the number of unemployed to 239 million

worldwide. The incidence of working poverty, however, would decrease to 15 to 19 per cent of

total employment. http://www.ilo.org/public/english/employment/strat/download/ep38.pdf

Interest Rates

According to the 2004 Livingston Survey (http://www.phil.frb.org/econ/liv/index.html), "forecasters see both short-term and long-term interest rates rising sharply over the next two years. When the federal funds rate increases, that is referred to in monetary policy terms as "tightening." Monetary policy tightening pushes up both short and long interest rates, leading to less spending by interest-sensitive sectors of the economy and therefore to lower real growth. This is often times done when the economy is recovering from an economic slow-down in order to balance the economic growth. Conversely, a monetary easing results in lower interest rates that stimulate real growth. (Mehra, 1996, Monetary Policy and long-term interest rates, pg. 27.)

A second forecast for interest rates by KiplingerForecasts.com states the following regarding the future of interest rates: "in the wake of a solid employment report for August, the Federal Reserve is likely to raise short-term interest rates by a quarter of a point at the September 21st meeting of the policy-setting Federal Open Market Committee (FOMCKiplingerForecasts.com further forecasts that the fed funds rate is likely to end the year at 2% and the prime rate at 5%. They place a minimum forecast by next year of 2.5% for interest rates determined by the FOMC.

A third forecast according to a survey of the Bond Market Association's Economic Advisory Committee released June 29, 2004, unanimously forecasts Fed policy makers will raise the key Fed Funds rate. (http://www.bondmarkets.com/story.asp?id=1203.)

Historical Data:

Historical data shows the gradual decline of interest rates over the last few years. There is an overwhelming opinion among economists that interest rates are bottomed and are on the way back up. As a matter of fact, when the prime lending rate hit a bottom of 4.0% from July, 2003 through June, 2004, it was the lowest it had been since April of 1959, 45 years! (found at: http://research.stlouisfed.org/fred2/data/MPRIME.txt.)

Inflation Rate

Inflation is the increase in the supply of money or the rise in prices associated with it. Economic problems solved right...wrong! "Inflation tends to rise when, at the current price level, demand for goods and services in the economy is greater than the economy's ability to produce goods and services - its output. One of the original descriptions of inflation remains valid - that 'too much money chases too few goods.' (http://www.bankofengland.co.uk/targettwopointzero/inflation/whatCausesInflation.htm). If the money supply outdoes the level of demand it creates inflation and devalues the American dollar and our economy as a whole.

According to the Congressional Budget Office. "BMI expects the growth momentum of 2004 will spill over to 2005 and 2006...Buoyant consumer spending and investment will be supplemented by expansionary fiscal policy, as well as improving global demand...This could well generate inflation pressures and, finally, exorcise the specter of deflation, to