Main Economic Forecasts

Main Economic Forecasts

The main economic forecasts used to understand the general outlook of the economy included the Congressional Budget Office (CBO) forecast, the Administrations Forecast, the Blue Chip consensus forecasts and the Mortgage Bankers Association (MBA) forecast. Not all forecasts contained the required indicators for the chosen indicators: employment growth, interest rates, housing starts, and business investment. For this reason, the analysis focused on a combination of the forecasts to understand the relationships among the indicators. Gleaning the economic forecasts led to a general understanding of the economy. Conducting further research on the economic forecasts led to a richer understanding of the selected indicators.

The focuses of the economic forecasts were real gross domestic product (GDP) and unemployment. The selected forecasts discussed real GDP and unemployment in depth to give the reader a general understanding of how the economy might respond in the next two years. According to the MBA, real GDP will drop in 2005 in comparison with 2004 and continue to decrease in 2006. In 2007, real GDP will increase slightly in comparison to the previous year. The MBA states the percent change in annual rates will be 4.4 in 2004, 3.8 in 2005, 3.3 in 2006 and 3.5 in 2007. According to CBO, real GDP will decrease in 2005 compared to 2004; GDP will decrease further in 2006 and continue to decrease during the 2007 through 2010. The CBO states the percentage change of real GDP was 4.4 in 2004, will be 3.8 in 2005, 3.7 in 2006 and 3.3 on average for the years 2007-2010. The Blue Chip consensus believes real GDP will decrease in 2005 compared to 2004, and continue to descend for the next two years, 2006 and 2007. Blue Chip consensus states real GDP for 2004 as 4.4, 2005 will be 3.7, 3.4 in 2006 and 3.5 in 2007. The President's administration believes real GDP will decrease in 2005 compared to 2004 and will continue to decrease in the next two years as well. According to the President's administration, real GDP for 2004 was 4.4; and will be 3.7 for 2005, 3.7 for 2006 and 3.5 for 2007. The MBA believes the unemployment rate will decrease from 5.5 in 2004 to 5.2 in 2005 and continue to descend to 5.1 in 2006 and 2007. The CBO believes that unemployment will decrease from 5.5 in 2004 to 5.2 in 2005 and remain at 5.2 through 2010. Blue Chip consensus believes unemployment will decrease from 5.5 in 2004 to 5.3 in 2005 and 2006 and drop slightly again in 2007 to 5.2. The administration believes unemployment will decrease from 5.5 in 2004, to 5.3 in 2005, to 5.2 for 2006 and 2007.

Comparative Table for real GDP and Unemployment

Forecaster Indicator 2004 2005 2006 2007 (2007-10)

MBA

Real GDP 4.4 3.8 3.3 3.5

Unemployment 5.5 5.2 5.1 5.1

CBO

Real GDP 4.4 3.8 3.7 3.3

Unemployment 5.5 5.2 5.2 5.2

Blue Chip

Real GDP 4.4 3.7 3.4 3.5

Unemployment 5.5 5.3 5.2 5.2

Administration

Real GDP 4.4 3.7 3.7 3.5

Unemployment 5.5 5.3 5.2 5.2

Economic forecasts predict real GDP to decrease while unemployment decreases. This can give a conflicting view on what the economy might do in the future. While it would appear that real GDP and unemployment should move in opposite directions, this is not necessarily true. According to CBO unemployment is currently near the natural rate of unemployment, making a decrease in unemployment almost unprecievable in the economy at large. Further, while industries may be hiring people, they may not be producing more goods and services. In the past few years, due to the recession, many corporations laid off workers and reduced the salaries of those who stayed on. By keeping the salaries low and rehiring employees at lower wages, the corporation can reduce unemployment and keep the production at past levels. Moreover, according to CBO, a moderate tightening of fiscal policy will remove some positive impact on disposable income in 2005. This phenomenon, coupled with foreign manufacturers producing goods in the U.S., will lead to decreased real GDP and decreased unemployment. The future of the economy seems to be on a slow growth trend compared to the growth that occurred in 2004, but nonetheless a continual slow growth exists. The MBA, the President's administration and the Blue Chip consensus forecasts are in agreement with the CBO forecasts; their respective numbers are slightly higher or lower but the reasoning in the same.

A Comparison of Two -Year Forecasts

CBO's assessment of the country's economic near term outlook is moderately more optimistic than the assessments of the administration, MBA and the Blue Chip consensus. CBO expects more rapid growth in both real and nominal GDP in 2005. The inflation forecasts for all forecasters are similar but CBO predicts lower rates of increase for the CPI-U, consumer price index unit, and GDP price index. The administration tends to follow what the CBO's forecasters predict for the future, while the MBA tends to follow what the Blue Chip consensus predicts. CBO and Blue Chip predict the same changes for interest rates; however, CBO's forecast for short-term interest rates in 2005 is lower than that of Blue Chips. CBO, Blue Chip, MBA and the administration have similar forecasts for the years beyond 2005. This is due to the unpredictable nature of the economy. All forecasters extend historical patterns in the facts that underlie their estimates of the growth potential of GDP, such as the expansion of the labor force, productivity and the rate of national saving. This implementation of historical patterns takes into account the possibility of business-cycle fluctuations by basing projected trends on historical averages and growth rates, which include periods of expansion and recession. CBO's medium-term projections also reflect the effects on potential changes in fiscal policy. The administration considers these changes and weighs their effects on the economy as having less of a negative and more of a positive effect. MBA forecasts take actions from the Federal Reserve into account, due to the close association of interest rates and housing starts. Blue Chip consensus considers all fiscal policy but does not weight the policy changes as having beneficial outcomes. Blue Chip is the