Transcript EC 827 Economic Forecasting and Models

EC 827
Section A: Module I
Introduction: Economic Concepts,
Measurements and Data Sources
Copyright 1998, R.H. Rasche
Vital Statistics

Geoff Jenkins
– Campus Address:
Department of Economics
108 Old Botany Hall
Michigan State University
East Lansing, MI 48824-1038
(517) 355-1861
– e-mail: [email protected]
– Office Hours: Business Complex ?
Copyright 1998, R.H. Rasche
Organizational Information

EC 827- Economics Web Page
– use Netscape or Internet Explorer to open:
» http://www.msu.edu/course/ec/827/
 Email
contact
» [email protected]
Copyright 1998, R.H. Rasche
Organizational Information
 Resources
available on EC 827 homepage:
» Electronic Syllabus
» Assorted “how to” guides, etc.
» PowerPoint presentations
Copyright 1998, R.H. Rasche
Organizational Information
 Working Assumptions
» Skilled at Using e-mail
» Skilled at basic functions of Netscape/IE, Word,
Excel (including formula) and PowerPoint
 Course
Structure
– Split between Section A and Section B
» Section A: forecasting models
» Section B: macroeconomics
Copyright 1998, R.H. Rasche
Macroeconomics and Forecasting:
What, Me Worry?
 Conditional
Business Strategies
 Macroeconomic
Environment (National and
International) as a Conditioning Factor
Copyright 1998, R.H. Rasche
Macroeconomic ImpactsExamples I
 Southeast Asia
1997-8-9, Russia 1998-9
 US Auto Industry in 70s and 80s
» (import competition)
 Japanese Auto
Industry in Early 90s
» (yen appreciation)
 S&L Industry
& Inflation in late 70s
 Texas vs. World Oil Prices: 1986
Copyright 1998, R.H. Rasche
Part I
Economic Activity, Growth,
Inflation, Unemployment, and
Policy Trade-offs
Copyright 1998, R.H. Rasche
Measuring Economic Activity:
GDP

Gross Domestic Product (GDP)
– Measure of the amount of all currently produced
goods and services that are sold on markets but
not resold during the period of measurement.
– Measure of Production
» Transactions that involve existing assets are
excluded - production (and GDP ) of past.
» Non-market activity (including productive
activity within household) generally not
included
Copyright 1998, R.H. Rasche
Measuring Economic Activity:
GDP
 GDP as
a flow
– measured over some period of time; without
reference to the time period, the concept has no
meaning
– U.S. and most major countries measure over
quarterly and annual periods
– SAAR (seasonally adjusted at annual rates), i.e.
corrected for normal seasonal fluctuations, and then
extrapolated to a year ahead.
Copyright 1998, R.H. Rasche
Measuring Economic Activity:
GDP
 Seasonal Adjustment
- Statistical Technique
to smooth out regular intra-year fluctuations
– reduces value in fourth quarter and increases
value in other three quarters
– particular importance in certain sectors, e.g.
consumer goods, agriculture
 Annual
Rates - adjustment to indicate rate of
production if continued at current pace for a
full year.
Copyright 1998, R.H. Rasche
Measuring Economic Activity:
GDP

If there’s inflation, nominal (current dollar)
GDP overstates rate at which economy is
growing.
– The Dollar value of the economy can grow,
simply because prices rise, not because of
increased output of real goods & services.
 Real
GDP is a quantity measure - most
comprehensive measure of volume of
production - independent of price changes
Copyright 1998, R.H. Rasche
Measuring Economic Activity:
GDP
 Real
and Nominal GDP
– Measuring aggregate of non-homogeneous items
requires a common unit of measurement
– Nominal GDP (current dollar) measures value of
current production in the monetary unit of the
country
– Real GDP (constant dollar) measures amount of
production valued at the prices of some specific
point in time (base year)
Copyright 1998, R.H. Rasche
Measuring Economic Activity:
GDP
 Real
and Nominal GDP, cont.
– By construction, real and nominal GDP are same in
base year
– Base year in U.S. data updated approximately every
five years.
» Feb, 1996 was last update to base year of 1992
from 1987.
» Purpose of updating base year is to minimize
measurement errors in most recent real GDP data
Copyright 1998, R.H. Rasche
Historical PerspectiveNominal and Real GDP
Nominal and Real GDP
8000
Nominal GDP
Real GDP
7000
6000
5000
4000
3000
2000
1000
0
1875
1889
1903
1917
1931
1945
1959
1973
1987
Year
Copyright 1998, R.H. Rasche
Historical Perspective Real Growth
Real Growth Rate
20
15
10
5
0
-5
-10
-15
-20
-25
1876
1889
1902
1915
1928
1941
1954
1967
1980
1993
Year
Copyright 1998, R.H. Rasche
Measuring Economic Activity:
Alternatives
 Industrial
Production
– manufacturing sector
 Personal
Income
– income received before personal taxes
 If
all that you’re measuring is economic
activity, income should equal production or
expenditure: what you make determines what
you earn determines what you spend.
Copyright 1998, R.H. Rasche
Business Cycle Phases
 Recession
(falling GDP)
 Recovery (rising GDP, out of the trough)
 Expansion (to above average levels of GDP)
 Average
U.S. Cycle Duration 48 Months
– Recession - 18 months average
– Recovery and Expansion - 30 months average
Copyright 1998, R.H. Rasche
U.S. Business Cycles: 1948
Trough Months
–
–
–
–
–
–
–
–
–
October, 1949
May, 1954
April, 1958
February, 1961
November, 1970
March, 1975
July, 1980
November, 1982
March, 1991

Peak Months
–
–
–
–
–
–
–
–
–
November, 1948
July, 1953
August, 1957
April, 1960
December, 1969
November, 1973
January, 1980
July, 1981
July, 1990
Copyright 1998, R.H. Rasche
Average Real GDP Growth
During Recessions
 48-9:
 53-4:
 57-8:
 60-1:
 69-70:
 73-5:
 80-1:
 81-2:
 90-1:
-1.1 % annual rate
-2.2 % annual rate
-3.4 % annual rate
-0.1 % annual rate
0.2 % annual rate
-2.3 % annual rate
-4.9 % annual rate
-1.7 % annual rate
-3.4 % annual rate
Copyright 1998, R.H. Rasche
Average Real GDP Growth
During Expansions
 49-53:
 54-57:
 58-60:
 61-69:
 70-73:
 75-80:
 80-81:
 82-90:
7.5 % annual rate
3.4 % annual rate
4.7 % annual rate
4.2 % annual rate
4.4 % annual rate
3.8 % annual rate
3.2 % annual rate
3.3 % annual rate
Copyright 1998, R.H. Rasche
Inflation: Consumer Price
Index
 Consumer
Price Index - CPI
– Measures average price of goods and services
purchased by urban, wage earning families.
– Prices measured relative to base year prices.
Current base period = 1982-84
– Data collected monthly
– Used to index many contracts, both private and
government (e.g. Social Security)
Copyright 1998, R.H. Rasche
Inflation: Consumer Price
Index
 Measurement
Biases in CPI
– New Products
– Quality Improvements/Adjustments
– Discount Stores = sample selection problem.
 Measurement
Problems generally believed to
add upward bias to CPI inflation of 0.5 to 1.0
percent per year
– Political issues of re-calibration… how to fix the
deficit and enrage the AARP in one easy step...
Copyright 1998, R.H. Rasche
Historical Perspective CPI Inflation
CPI Inflation Rate
18
12
6
0
-6
-12
1876
1889
1902
1915
1928
1941
1954
1967
1980
1993
Year
Copyright 1998, R.H. Rasche
Inflation: Post WWII
Experience
 Stability:
1950s - 64
 War: Vietnam Era: 1965-73
 Sudden, unpleasant surprises: Oil: 1974-81
 “Volcker Disinflation”: 1981-2
 Stability: 1980s,
 “Greenspan period”: 1987-present
Copyright 1998, R.H. Rasche
Employment and
Unemployment
 Consumer
(Household) Survey Data
– Employed if working
» ignores underemployed or overemployed
– In Labor Force if Employed or looking for work.
» Homemaking? Only if you’re a French politician…
– Unemployed = Labor Force - Employed
– Unemployment Rate = Unemployed/Labor Force
Copyright 1998, R.H. Rasche
Historical Perspective Unemployment Rate
Unemployment Rate 1890-1995
30
25
20
15
10
5
0
1890
1902
1914
1926
1938
1950
1962
1974
1986
Year
Copyright 1998, R.H. Rasche
Unemployment Rate
 Frictional
Unemployment
» The lucky: Moving from job to job
– Natural Rate of Unemployment
 Cyclical
Unemployment
» The unlucky: Waiting for better days
 Structural
Unemployment
» The clueless, helpless, hapless, hopeless
» These are the people that need & can use help
Copyright 1998, R.H. Rasche
Historical Perspective Inflation vs Unemployment
Phillips Curve 1890-1995
25
20
15
10
5
0
-5
-10
-15
0
5
10
15
20
25
30
Unemployment Rate
Copyright 1998, R.H. Rasche
Part V
Interest Rates
Copyright 1998, R.H. Rasche
Interest Rates
 Nominal
Interest rates
– measure the fraction (or percentage) of value of a
loan earned by lender (or paid by borrower) per
time period
– Short-term nominal rates
– Long-term nominal rates
 Term
Structure of Interest Rates
Copyright 1998, R.H. Rasche
Historical Perspective Nominal Interest Rates
Long- and Short-term Nominal Interest Rates
16
COM_PAPER
CORP_BOND
14
Percent
12
10
8
6
4
2
0
1875
1888
1901
1914
1927
1940
1953
1966
1979
1992
Year
Copyright 1998, R.H. Rasche
Interest Rates
 Real
Interest rates
– measure the fraction (or percentage) of the
purchasing power of a loan that lenders expect to
earn (or borrowers expect to pay) per period
– requires a measure of expectations (or forecasts)
of inflation over the life of the loan
– real rate approximately equal to nominal rate expected future rate of inflation
» Fisher-effect problems
Copyright 1998, R.H. Rasche
Part II
How to get Economic Data
Copyright 1998, R.H. Rasche
FRED
 No
Central Statistical Agency in U.S.
 Federal
Reserve Bank of St. Louis
– maintains an electronic data base
– accessible via Internet
– Web address:
» http://www.stls.frb.org/fred
– data series can be downloaded using Netscape to
local computer files
» see How To on EC 827 Web page
Copyright 1998, R.H. Rasche
Using Data Retrieved from FRED
 Data
files can be opened and analyzed with
Excel
– eliminating blank rows: see How to on EC 827
home page
– Creating quarterly dates: see How to on EC 827
home page
– Creating quarterly average data from monthly
series: see How to on EC 827 home page
Copyright 1998, R.H. Rasche
US Economic Data
Graphs
 National
Economic Trends
– Federal Reserve Bank of St. Louis
– www.stls.frb.org/publ/net
 Monetary
Trends
– Federal Reserve Bank of St. Louis
– www.stls.frb.org/publ/mt
Copyright 1998, R.H. Rasche
www.stls.frb.org/publ/net
Example
Copyright 1998, R.H. Rasche
Weekly US Financial Data
Graphs
 Federal
Reserve Bank of St. Louis
– US Financial Data
– www.stls.frb.org/publ/usfd
 Most
US Economic data is either unavailable
or unreliable over short (weekly, daily)
periods, but the same techniques can be
applied as for longer term data
Copyright 1998, R.H. Rasche
www.stls.frb.org/publ/usfd
Example
Copyright 1998, R.H. Rasche