Macroeconomic Forecast

Macroeconomic Forecast

Introduction

Forecasts and historical data are obtained from financial institutions, investment firms and forecasting groups. The historical data can indicate trends to help support the forecasts. The individual forecasts will be related to real Gross Domestic Product, the Consumer Price Index, Unemployment in the US, 10 Year Treasury Notes, and Disposable Personal Income.

The economy of a country can be stimulated to grow if disposable income is increased, but only if the population actually uses the funds to consume. This instills confidence in businesses to produce and the gross domestic product for the country will increase. Increasing consumption risk inflation and a rising consumer price index.

Gross Domestic Product

The Gross Domestic Product (GDP) for the US has grown every year since 1949. GDP is a measure of product produced by US citizens. Increases are a reflection of increased production efficiencies and sales. A continual improving GDP indicates a country with an expanding production base.

As a measure, GDP makes no distinction between products and services. Over time, American industry has become more service based. In addition, the population of the US has grown. Therefore, increases in GDP are also a product of greater labor capacity.

Chart 1.0. Gross Domestic Product History and Forecasts

The change in GDP measured in percentages varies from years to year. The past ten years has seen a high of 6.2 percent in 1994 and a low of 2.9 percent in 2001. The variations for the past ten years are depicted on Chart 1.0.

Included on chart 1.0 are three projections for future GDP. The individual projections are identified as Banker (The Mortgage Bankers Association), Congress (Congressional Budget Office Projections for Calendar years 2004 through 2014) and Conference (The Conference Board).

The first noticeable trend from the historical data is in 2001. This can be attributed to lower economic activity after 911. However immediately following this event, the world economy was hit by SAR's, Iraq, and the Avian flu. All if these event had varying affects on the world economy and as a result affected the US.

In the forecasts, the only noticeable difference is the Banker line. They correctly predicted the return of a higher GDP in 2003 and predict a lower GDP for 2004 of 3.15%. This contrasts with the congress and Conference, which see a higher 2004 averaging around 5.0. The difference in estimates reflects the different position the groups are concerned with. The Mortgage industry does not want to see a higher GDP; this might induce the FED to begin tightening the money supply. This would cause an increase in interest rates making mortgages more expensive and as a result reducing the profit potential of the industry.

The Consumer Price Index

The consumer price index measures the changes in costs for consumers. Note again the sharp spike downward in 2001. This is a reflection of 911 and consumers reducing spending. Clearly, this is a direct measure of the effectiveness of this terrorist act on America.

Chart 2.0. Consumer Price Index - Past performance and future forecasts

The forecasts all predict lower price increases in the next two years (Chart 2.0). The first few months of 2004 have been rocked by rapidly increasing fuel costs making these predictions questionable. Yet, all three estimates indicate the same expectations.

The Fed is pursuing a policy of expanding money supply within the US. Expanding the money supply should result in some inflationary pressure. These forecasts suggest this policy is not expected to be successful. It is notable that the mortgage Bankers expects the greatest increase yet do not expect any increases in GDP.

Unemployment in the US

GDP has little effect on the average consumer and the consumer price index tells them what they already know; the change in prices they are paying. Un-employment is something that comes home very fast and personal. When someone loses their job, it can be devastating in its affect.

On chart 3.0, we see how the unemployment rate steadily declined from 1993 to 2001. Remembering the affect of 911, SARs and Iraq on GDP and the CPI we should not be surprised that the drop in consumer demand also affected employment. The years 2001 through 2003 are recession years and unemployment has risen to 6 percent. Americans are concerned about this unemployment rate yet it is not close to the 7-10 percent figure reached during recessions in the seventies and eighties.

Chart 3.0. The US Unemployment rate history and future forecast

Again, the three forecasts are very similar in predicting a fall in unemployment. It is expected that the rate will fall from 6.0 to 5.0 percent within the next two years. The Mortgage bankers did note a concern for 2006. They hoped the current easy money policy would continue fueling a robust recovery. This is understandable considering they are in the financing business.

10-Year Treasury Notes

Treasury notes are one means the Fed uses to acquire funds for government operations. Selling notes removes money from the system creating a negative position to the easy money policy of today. The notes are also a reflection of the current interest being paid in industry. On Chart 4.0, we find the interest rate steadily decreasing from 1994 to 2003. This represents an easing of controls on the money supply the entire period. This everyone will recognize as the historically low rates of interest being charged today.

Chart 4.0, 10 Yr Treasury Notes, past interest and future projections

The forecast all show the interest on these notes increasing. This indicates an expectation of an expanding economy beginning this year. The GDP shows a lower but steadily increasing product total, the CPI remains under control and employment is expected to fall. All these factors indicate an improving economy. Therefore, the forecasters are predicting a tighter money policy by the Fed. The interest changes in the 10-year notes are a reflection of all these expectations.

Disposable Personal Income

Disposable personal income offers a choice. It is the income that becomes available to be used for consumption or to be saved. If income is saved