Macroeconomic Forecast

Macroeconomic Forecast

Macroeconomic forecasting combines investigating and applying economic reasoning to the known, the unknown, and the unknowable. Forecasting has flaws because the future is by no means completely predictable, but economic indicators can help prepare for changes in the business cycle. These leading, lagging, and coincident indicators help foresee the business cycle so that the Federal Reserve (Fed) and government officials, as well as the business community, can anticipate and adjust to possible downturns in the U.S. economy. The business cycle is divided into the following phases: expansion or recovery, peak, contraction or recession, and trough. The indicators point to certain times in the business cycle. The leading indicators anticipate the direction in which the economy is headed. Coincident indicators offer information about the current condition of the economy. Lagging indicators occur months after a recession or expansion and help predict how long that particular phase will last (Fed 101, 2005). To assess the future of the economy and its impact on MPG construction, Team B weighed the forecasts of the Federal Reserve, the Congressional Budget Office, and the National Association of Realtors on GDP, inflation, unemployment, interest rates, and foreign exchange rates against hard currencies.

Recognized Forecasters

With the assistance of 500 economists and volumes of economic data (Nash & Duvall, 2005), the Fed is the forecasting group with the best opportunity to accurately predict the U.S. economy. The Fed predicted that the gross domestic product (GDP) for 2003 to 2004 would experience a growth between 4 and 4.4%. The Fed accurately predicted that indicator for those years. Statistical and historical data of the Fed's forecasts can be retrieved from http://www.federalreseve.gov.

The Fed uses a large-scale quarterly econometric model called the FRB/US based in part on the MPS (MIT-Penn-SSRC) model, the VAR model, and the real-time model. This model bases predictions on specific expectations of households, firms, and financial markets (Brayton, Mauskopf, Reifschneider, Tinsley, & Williams, 1997). During the last decade, the forecasters at the Fed have had to predict the U.S. economy amidst various extremes such as "a productivity boom, a stock market boom and bust, a recession, the Asian crises, the Russian debt default, corporate governance scandals and an abrupt change in fiscal policy" (Tetlow & Ironside, 2005).

A second forecasting group that has the resources of the federal government is the Congressional Budget Office (CBO). The CBO's evaluation uses the mean error (the arithmetic average of the forecast errors) to measure any statistical bias that appears in the office's forecast. The CBO explains that forecasters tend to err in their forecasts during periods that include either turning points in the business cycle or significant shifts in the trend rate of productivity growth (CBO's economic forecasting record, 2004). The CBO's forecasting history can be reviewed at http://www.cbo.gov.

Not surprisingly, the CBO does not use a single economic model, such as monetarist or Keynesian, in forecasting one of the largest and perhaps the most complex economies in history, the U.S. economy. In making 10-year projections, the CBO takes into consideration current law, federal tax implications, and government spending trends (Description of economic models, 1998).

The Gross Domestic Product (GDP)

The aggregate output is labeled the GDP and is the total worth of all final good and services produced in a given year (McConnell & Brue, 2001). The gross domestic product (GDP) has declined in only five quarters in the last 20 years according to the February 16, 2005, testimony of Fed Chairman Alan Greenspan (Greenspan, 2005). The Fed has forecast that the real GDP growth will be at 3Ñ*% to 4% through 2005. In 2006, the Fed has predicted that the real GDP will increase about 3Ð...% (Monetary Policy and the Economic Outlook, 2005). The GDP is reported quarterly and is a pro-cyclical indicator. Being pro-cyclical, the GDP is moving in the direction of the economy that is as the economy strengthens the GDP increases (Moffatt, 2005). According to the Fed, the GDP growth will drop even more from its 2004 level of 4.4% to 3.7% in 2005 dip even more and return to around 3.6% by 2006. (Guzman, 2005, March)

Implications of Macroeconomic Forecast on MPG Construction

MPG Construction is a company that specializes in the construction of retirement condominiums in Evanston, Illinois. Team B has analyzed the macroeconomic forecasters for 2005 and 2006 to identify the impact of those forecasts on the mortgage rates retirees will pay when buying housing in 2005 and 2006; to determine the prices MPG should place on the units it puts on the market in 2005 and 2006; and to determine the number of units MPG Construction should place on the market in 2005, and 2006.

A Look at the City of Evanston

Evanston is located in a spectacular natural setting on Lake Michigan just 13 miles north of downtown Chicago. Home to Northwestern University, Evanston is situated on 7.8 square miles with a population of 74,239. Evanston has 29,651 households with a median income of $56,335. The value of the average single family home is $290,800. Of the householders in Evanston, 36 percent live alone and nine percent are 65-years-old or older (City of Evanston, 2005).

Inflation

Inflation is a factor that affects the forecasting for the construction business. Inflation is the increase in the average level of prices for goods and services (Schiller, 2005). An increase in prices has a tremendous effect on the price of goods and supplies and is a key factor to consider in construction. The more MPG Construction pays for supplies the costlier it becomes to produce a house. The Consumer Price Index (CPI) "measures changes in the prices of a fixed market basket of some 300 goods bought by the typical urban consumer" (McConnell & Brue, 2001, p.130).

"The National Association of Realtors (NAR) in Washington, D. C., forecasts an astounding 6.8 million home sales this year, thanks to low mortgage rates"(Latest economic indicators, 2005). The majority of these sales are expected to come from the retired population. Number of retirees is expected to grow significantly over the coming years and they will be looking to purchase permanent residences. The market catering to that demographic is expected to become very profitable in the near future with the growth of "the number of retirement homes sold per year expected to increase