Macroeconomics Forecasts Term Paper

  • Length: 5 pages
  • Subject: Economics
  • Type: Term Paper
  • Paper: #8077687

Excerpt from Term Paper :

remedy for the U.S. economy as the country has started to recover from the shock of September 11. Though the tragedy of September has drastically effected the economic growth of the country but the forces of recovery will soon lift the economy out of the recession. However, this turnaround is going to go a long way. The general opinion about the economy of the United States is that the recession will end around the first quarter of the year 2002 and the growth in real gross domestic product for the year 2002 is expected to be about 2.5% which will be definitely a huge achievement. However, this growth is expected to be slow but with a constant pace. According to the economic analysts the real GDP growth will pick up by the second half of the year 2002 and therefore most of the investors are expecting a reduction in the interest rates by the Federal Reserve but only to the extent that will help the monetary policy to shift from its highly accommodative approach to a more middle-of-the-road position. Consumer spending will grow more closely with household income. Capital spending will be guided by profits and cash flow, and stock prices will rise in line with more sensible expectations for risk and reward. Though the majority of the forecasters are quite optimistic about the economic growth of the country, however some less optimistic forecasters are not much hopeful. According to them, there are some hurdles to the steady growth of the economy such as the surplus production capacity in the technological sector will against a rebound in capital spending. Finally, weak demand from abroad will not dissipate until after the U.S. recovery is established. (Business Week Online)

The average growth forecasted, from the opinions of different forecasters, is estimated to be 1.5% in the first half and 3.5% in the second. Moreover, the jobless rate is expected to rise in the second half of the year 2002 because of the steady recovery of the economy. On the other hand, the inflation is estimated to remain below the level of 2%.

According to the economic forecasters of Citigroup the annual rate of change in GDP is expected to be 3.8% and 3.7% for the years 2002 and 2003 respectively. Moreover, the change in consumer price index is forecasted to be 2% and 2.2% for the year 2002 and 2003 respectively. On the other hand, the jobless rate is expected to be 5.5% and 5.8%. However, the forecasts developed by the forecasters at Merrill Lynch estimates that the percentage change in the GDP is expected to be 3% for the year 2002 as well as 2003. The CPI (Consumer Price Index) is expected to be at 1.3 and 1.9 for 2002 and 2003 respectively. On the other hand, the jobless rate is estimated by them at the about 6.1% and 5.7%. The rate of inflation, as measured by the growth of the consumer price index (CPI), is expected to decline to around 2.8% in the year 2002. This projection is however based on the assumption by the Congress that the oil prices will decline in the world market however the underlying inflationary pressure from the tight labor market will remain there. (Business Week Online)

The average rate of inflation is estimated to be about 2.6% as measured by the change in the consumer price index and 2.0% as measured by the change in the GDP price index. These projections for inflation reflect an assumption about the rate of inflation in line with the Federal Reserve policy. It is assumed that the prevailing unemployment rate will not remain low in the near future although it has being accompanied by a slight increase in the inflation rate. The surge in the productivity growth rate of the economy, experienced recently, has lowered the rate of unemployment but on a temporary basis. Moreover, it is very much likely that the growth rate of labor costs will ultimately come up to the increase in productivity growth, putting downward pressure on profits and upward pressure on inflation. That inflationary pressure is expected to develop even in the condition of high growth in labor productivity. It has been assumed by the majority of the economists that the keeping the CPI inflation in view, the unemployment rate is expected to remain at an average of 5%.

On the other hand, the economists project the interest rate by adding the projection for the consumer price index inflation (CPI Inflation) to the projection for the inflation adjusted interest rates. The real interest rate on the three moth treasury notes projected for the coming year is estimated to be around 2.4% while for the ten-year treasury notes it is expected to be around 3.3%. The real interest rate for the ten-year treasury is though somewhat similar to its last decade's average; however, the real three-month rates have risen to a slight level.

The projections developed by the economic forecasters for the federal budget are closely associated to their projections of economic activity and components of national income. As the components of national income are taxed differently at different rates, the distribution of income among it's components is a very essential part of the economic projections. In this regard, the wages of the labor, the salary expenditures and the profits earned by the companies are the most important component as they are the highest revenue producing components. These vital categories have risen from 54% in the early 90s to 57.2 in 2000, as a share of GDP. However, the future projections show a decline in their share to 56% in the year 2002. According to the economic forecasters, the sum of the high-tax categories of income is expected to grow more slowly than GDP during the next 10 years because the depreciation is projected to be much higher, which reflects the high investment rates of the recent past. There has been a very swift increase in the capital stock of the country which can be truly attributed to the boom in business investment during the past five years. Moreover, companies will benefit from the high depreciations as it will help them to deduct increasing amount of depreciation from their taxable incomes. It is estimated that the deductions in the taxable income will rise from 7.8% of GDP in 2000 to 9.1% in 2008. This trend is expected to remain the same till the year 2011.

The congress has estimated that the federal revenue is expected to exceed from the level of $2.1 trillion in fiscal year 2002 provided that the governmental policies remained unchanged. Revenues are expected to grow more slowly than the nominal GDP through the year 2002 as well as the year 2003. However, the growth in the Revenues is projected to grow faster than GDP in the long-term. In the year 2011, revenues are projected to be $3.4 trillion, or about 20.4% of GDP. It is expected that the growth of the receipts in terms of revenues will be slower as compared to the swift rate of the past few years. The past trend of the growth of receipts was pretty impressive as the revenues collection rose with an average rate of 8.3% from 1994 to 2000. The highest growth was being observed in the year 2000 when the growth reached the mark of 10.8%, the highest growth rate since 1987. ()

The expected growth in the economy is primarily based on an unexpected increase in the growth of the economy's ability to produce goods and services. There has been an increasing growth in the labor productivity of the United States economy and it has paced up from the rate of 1.5% a year during the decades of 70s and 80s to a rate of 2.9% in the late…

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