The United States Economy Forecast - Research Paper Example

due: U.S Economy Forecast Economic forecast is a ment about the future that is derived from informal techniques and statistical models. The forecasts may be inaccurate or accurate, imprecise or precise, badly based or well based and may focus on long or short-term horizons (Hendry & Neil 15). Economic indicators are elements that are used to recognize the following pattern of economic contraction and expansion as it occurs over and over again. In addition, the economic indicators provide a precise stand of what direction the economy has gone and where it is headed. For instance, economic indicators illustrate when the economy falls like in a recession and when the economy grows like during economic development (Griffis, ch.1). This paper will predict the economic future of U.S economy one year from now. In economics, economists develop laws of economic behavior based on the presumption that states do not count, but markets do. In economics, the most important issue is whether the presumptions generate a successful proposition that can be empirically tested and proven to be invalid or reasonable. From this perspective, the major challenge in the economic forecast is the neglect of the function of the state in economic concerns specifically international economic growth. In fact, national activities and policies are significant for economic results (Gilpin, R. & Gilpin, J. 61). Another challenge encountered when making economic forecast is the concept of weak efficiency. Weak efficiency is a theory that assumes that past forecasts play a critical function in establishing present predictions (Dovern 2). In addition, economists are less conversant with the regional cycles and trends hence the problem of predicting changes in these areas. Moreover, the error of incorrect revenue is another element that can create a problem in producing accurate forecast on the state of the economy. Also, data revisions pose a challenge to forecasts because when there is a structural change in the economy, the forecasting models need to be changes which may consume much time (Higgins 22). State and national economic predictions assist forecasters to generate an approximation of anticipated revenues from fundamental tax ground on the current price. In addition, other professionals in the budget department use the predictions to plan an expenditure budget and provide recommendations for the next fiscal period (Forsythe & Boyd, memo 3). Important indicators used to forecast the state of the economy The economic indicators do not impact the economy in the same manner. Generally, there are three types of economic indicators that are grouped in accordance with the timing of how the influence the economy. The three types of economic indicators include coincident, leading and lagging. A leading economic indicator normally changes ahead of the economic transformation. In addition, a leading economic indicator plays a role of a sneak peek for investors and economist that assist them to make informed predictions about what is going to happen. An example is the stock market that indicates these predictions hence it is considered a leading indicator. When the stock market is elevated, people tend to believe that the economy will perform better. When the stock market falls then, individuals believe the economy will perform poorly. Coincident and Lagging indicators are not very useful in assisting people to make predictions but have critical impacts on the economy. A coincident economic indicator is one that easily moves at the same time the economy is changing. An excellent example of a coincident indicator is the GDP (gross domestic product). The GDP report provides the total value of what is produced by business and earnings of the consumers and commerce. The GDP report collects information from different sources that include other economic indicators and compile them into one report. In other words, it tries to refine the economy into one number. The GDP report is generated quarterly, which indicates the underlying economic details that display the economics’ current status (Griffis ch.1). A lagging economic indicator is one that fails to alter its course until after some period following economic changes. For instance, the unemployment rate is considered a lagging indicator because the unemployment percent of individuals who are jobless in a nation seems to increase for two to three quarters after the economy is enhanced. In such a case, a quarter is a period of three months (Meyer 11). Another economic indicator is personal income where economists observe consumers income and spending patterns. Personal income indicators demonstrate how much money individuals take home every month. For example, if individuals are concerned about the economy or are uncomfortable about their work, they tend to spend more money shopping. As a matter of fact in such a case people avoid taking loans to buy cars or make constructions. A source of consumer spending is retail sales statistics, which show what consumers buy every month and the quantity purchased. The U.S Federal Reserve pronouncements and actions also indicate the status of the economy. The U.S federal manages the money circulating in the country, and its role is to maintain inflation so that it under control. The reports and actions generated by U.S Federal Reserve are a reliable source that indicates the economy’s present and future situation (Griffis ch.1). The manufacturing industry producing consumer products also serves as a key economic indicator. The consumer products are grouped into two; consumer durables and consumers staples. Consumer durable goods are the products that are intended to be used for a couple of years. These products include automobiles, laptops, kitchen appliances and home entertainment systems. People do not purchase such goods frequently unless the old ones are not working. Therefore, purchase of durable goods shows how freely consumers make discretionally purchases indicating their purchasing power. On the other hand, consumer staples, which are also known as nondurable goods, consist of cosmetics, medicine, beverages, and foods. The movement of such goods does not indicate much about the economy because they are basic commodities. In addition, consumers utilize personal credit cards to buy services and goods and loans to purchase durable goods. The interest rates that the consumers pay for the loans fall and increase as the economy rates change during the recession and economic growth. In most cases, short-term loans are charged lower interests compared to long-term loans. In an event the short-term rates are closer to long-term rates, then, it indicates that the economy is in bad health. In a case where the short-term rates are above the long-term rates, then a recession is seen in the near future (Griffis ch.1). The mortgage market also serves as a key economic indicator that reflects on the economic health of a country. The housing indicators are greatly influenced by the economic status. In a case where the economy is performing well, the housing market is often strong. A strong market for new homes is an indicator that consumers can invest in huge, long-term financial agreements. Inflation is a key indicator of the economy. Every economy has a little inflation, which is healthy. Inflation makes the money earned by individuals worthless and pushes the prices to rise without cause. In such a scenario, prices going up are not triggered by a change in consumer buying habits neither the supply of products. Inflation is a key indicator for the bond investor because it wears down the value of the bond interest rates. As the inflation increase, the bond value falls (Griffis, ch.1). Several indicators are used in predicting the state of the economy. They include a yield curve and leading economic indicators. A yield curve is a reliable forecaster of future real economic activity and is employed by Federal Reserve Banks. The yield curve has been in use since 1980s and has proved its validity. In addition, the tool is used to predict U.S recession where the width between interest rates of the three-month Treasury bill and the ten-year Treasury note are utilized to predict (Federal Reserve Bank of New York para 4). The leading economic indicators (LEI) were created by NBER and printed by the BEA in the ‘chart book’ of the Survey of Current Business. LEI is made up of various parts that is Real M2 money supply, interest rate spread, index of consumer, stock prices, and average weekly hours of production. The interest rate spread is a ten year Treasury bond rate minus federal funds rate. It is referred to as the measure of the yield curve. Real M2 money supply is an element that is a summary of the saving and checking accounts, non-institutional money market and physical currency. The average weekly hours of production by employees is information provided by the U.S. Department of Labor’s Bureau of Labor Statistics on a monthly basis. The stock prices is measured by the Standard & Poor’s 500 Index, which is a standard for U.S equity market. The index of consumer expectations is information given by the University of Michigan that look into the consumer’s subjective hope for future and current economic condition (Free 299-300). Case study A (Austrian perspective) The perspective of the Austrian model is that rational expectation presumption acts as a device for the analytical organization instead of a descriptive belief about the real world. This model assists to trace which economic outcomes can be produced without putting into consideration forecasting errors. This theory required predictors to justify the basic data asymmetries (Cowen 8). A report by Bureau of Economic Analysis (2015), indicates that the 1st quarter 2015 GDP is at 0.2 percent while the 4th quarter 2014 stands at 2.2 percent. The quarterly data released shows that the real GDP in terms of the value of the production of services and goods in the U.S, modified for price changes, expanded at a yearly rate of 0.2 percent in the first quarter of 2015. This report is based on the ‘advance’ approximates released by the Bureau of Economic Analysis. The figures also indicate the real GDP expanded by 2.2 percent in the fourth quarter (Bureau for Economic Analysis para 2). Real GDP development was slow in the first quarter because the dollar gains strength against other major currencies. It was as a result of exports and imports being delayed by conflict in the West Coast, severe winter weather and fall of energy prices. The decline in economic activity led to a decreased in consumer spending, in government and state spending, in residential fixed investment and downturns in exports. In addition, the slowdown resulted in a decreased rate of nonresidential fixed investment that was moderately neutralized by retarded imports and an upturn in federal government spending and inventory investment (Mataloni para 2). Case study B (Neo-Keynesian perspective) The neo-Keynesian concept is grounded on the presumption of maximizing economic agents and possess a solid micro-economic foundation. In this model, wages and costs are presumed to change slowly in reaction to disturbances. This fact is based on the environment of insufficient information where the economic agents need to make resolutions. In addition, the market for labor and commodities may fail to be precise, and demand pressures can trigger disturbances in economic employment and activity. In addition, the concept argues that expected and unexpected adjustments in monetary policy can result in changes in output. The Keynesian concept insinuates that policy measures and matters can assist to make the economy stable specifically in situations where shrinking in economic activity is caused by pessimism attitude (International Monetary Fund 59). The real DPI (disposable personal income) expanded 6.2 percent in the first quarter after a growth of 3.6 percent in the fourth quarter. The present dollar DPI elevated by 4.1 in the first quarter following a rise of 3.2 percent in the fourth quarter. A slacking acceleration in present dollar DPI compared to the real DPI indicates a huge decrease in the absolute price deflator for consumer spending that is employed to chasten DPI The prices of commodities and services bought by U.S citizens reduced by 1.5 percent in the first quarter of 2015 behind a dropping 0.1 percent in the fourth quarter of 2014. In exclusion of energy and food, gross domestic buying prices swelled by 0.3 percent after expanding by 0.7 percent. The personal saving proportion as a percentage of the present dollar DPI in the first quarter was at 5.5 percent and 4.6 percent in the fourth quarter (Mataloni para 2); (See attached appendix with illustration charts). Case study C (Marxism perspective) The concept of Marxism developed by Karl Marx, emphasizes on a strategy to political economy that the theorist referred to as ‘historical materialism’. The idea of materialism catches the drifting relationships between state and economy through tussles between each other. In this concept, analysis of political economy begins with property associations in various ways of production and assess the connection between people in this setting (Jones 317). The Bureau of Labor Statistics publication shows that the sum of nonfarm payroll employment grew by 223,000 in April 2015. Also, the report indicates that the rate of unemployment remained constant at 5.4 percent. Job opportunities emerged in construction, health care, and business and professional services. On the other hand, the rate of employment in the mining sector continue to reduce (United States Department of Labor para 1). An estimated 11.5 million jobs have been generated since February 2010, which represents a net loss of 578,000 in the public area and a gain of 12.1 million in the private sector. Approximately, two-thirds of the enhancement in the rate of unemployment over the past year was because of reducing long-term unemployment. Nevertheless, the long-term unemployment rate remains high at a rate of 1.6 percent more than its average of 1 percent between 2001 and 2007 (U.S. Department of the Treasury 6-7). Conclusion and Reflections A possible wild card event that can interfere with the result of this economic forecast is a shift in the equilibrium-mean. There is no assurity that the performance of the forecast is of higher quality compared to other models. In conclusion, from the perspective of exchange rate predictions, the U.S economic development is likely to continue gaining momentum as in the case of spring 2014. As witnessed after PNC economic predictions that Federal Reserve will introduce an increased rate in Federal funds in a second half of the year 2015 did not affect the dollar index. This is evidence that the U.S interest rates will increase in the coming year, and the dollar index is expected to remain constant despite the strong economy. From the perspective of other currencies, the dollar may not stand strong against the pound, Loonie, euro, peso and yen in a period between 2015 and 2016. The situation will be as a result of dropping unemployment rate and a continued growth of U.S interest rates (The PNC Financial Services Group, para 1). On reflection, an economic forecast is influenced by various factors in the market. Moreover, the political elements of a country play a significant role in the outcome of an economic predictions. The unemployment rate of a country indicates the economic health of a particular nation. For instance, in this case, the rate of unemployment in U.S is constant, but job opportunities surface from various sectors of the economy. From this point of view, the U.S economy is healthy and when the correct measures are put in place can become better in the coming year. Appendix 1 GDP, DPI (Disposable Personal Income), Prices Advance Estimates for the First Quarter of 2015 Source: Mataloni, Lisa S. GDP and the Economy Advance Estimates for the First Quarter of 2015. 1 May 2015. Web. 26 May 2015. http://www.bea.gov/scb/pdf/2015/05 May/0515_gdp_and_the_economy.pdf Works cited Bureau for Economic Analysis. U.S. Economy at a Glance: Perspective from the BEA Accounts. U.S. Economy at a Glance. Department of Commerce, 19 May 2015. Web. 26 May 2015. http://www.bea.gov/newsreleases/glance.htm Cowen, T. (2002). Risk and business cycles: New and old Austrian perspectives. Routledge. Dovern, Jonas. Information Rigidities in Economic Growth Forecasts: Evidence from a Large International Panel. Washington, D.C.: International Monetary Fund, 2013. Internet resource. Forsythe, Dall W, and Donald J. Boyd. Memos to the Governor: An Introduction to State Budgeting. Washington, D.C: Georgetown University Press, 2012. Internet resource. Free, Rhona C. 21st Century Economics: A Reference Handbook. Thousand Oaks, Calif: SAGE, 2010. Print. Federal Reserve Bank of New York. The Yield Curve as a Leading Indicator. - Federal Reserve Bank of New York. Web. 26 May 2015. http://www.newyorkfed.org/research/capital_markets/ycfaq.html Gilpin, Robert, and Jean M. Gilpin. Global Political Economy: Understanding the International Economic Order. Princeton, N.J: Princeton University Press, 2001. Internet resource. Griffis, Michael. Economic Indicators for Dummies. Hoboken, N.J: John Wiley & Sons, 2013. Internet resource. Higgins, Matthew L. Advances in Economic Forecasting. Kalamazoo, Mich: W.E. Upjohn Institute for Employment Research, 2011. Print. Hendry, David F, and Neil R. Ericsson. Understanding Economic Forecasts. Cambridge: MIT Press, 2003. Print. International Monetary Fund.World Economic Outlook: A Survey by the Staff of the International Monetary Fund. Washington, D.C: International Monetary Fund, 1998. Print Jones, Martin, et al. An introduction to political geography: space, place and politics. Routledge, 2014. Meyer, Susan. Understanding Economic Data. New York: Rosen Pub, 2012. Print. P.11 Mataloni, Lisa S. GDP and the Economy Advance Estimates for the First Quarter of 2015. 1 May 2015. Web. 26 May 2015. http://www.bea.gov/scb/pdf/2015/05 May/0515_gdp_and_the_economy.pdf United States Department of Labor. Employment Situation Summary. U.S. Bureau of Labor Statistics. U.S. Bureau of Labor Statistics. 8 May 2015. Web. 26 May 2015. http://www.bls.gov/bls/newsrels.htm U.S. Department of the Treasury. Report to Congress on International Economic and Exchange Rate Policies. 9 Apr. 2015. Web. 26 May 2015. http://www.treasury.gov/resource-center/international/exchange-rate-policies/Documents/Report to Congress on International Economic and Exchange Rate Policies 04092015.pdf Read More