The U.S. economy to 2018: From recession to recovery

Monthly Labor Review

Volumn 132, Issue 11, 2009, Pages 11-29

  Wyatt, Ian D ^a   Byun, Kathryn J ^a  

^a BUREAU OF LABOR STATISTICS   (United States)

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EID: 77749310478     PISSN: 00981818     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (40)

1. All figures in this article, except growth rates and dollar values, are real values using year-2000 dollars
2. The model used for this year's projections reflects the National Income and Product Accounts (NIPA) data published in July 2009, including GDP data and other data for the first quarter of 2009. Revisions to GDP data released after that time are not included in the BLS projections. However, it is important to remember that those projections are long-run projections based upon long-run trend analysis. The major NIPA revision, if incorporated, would have a limited impact on the BLS projections.
3. This model has been used to prepare BLS aggregate economic projections since May 2002. Macroeconomic Advisers developed and still supports the Washington University Macro Model, which the firm's team uses as a central analytical tool for its short- and long-term forecasts of the U.S. economy. The model operates and performs simulations on a Windows-based software program called wummsim.
4. Until the recent release of Federal Open Market Committee notes, the levels of unemployment and inflation that the Fed targeted were frequently debated. According to the minutes from the January 2009 meeting, the Fed's targets are to keep core personal consumption expenditure price index inflation at 1.7 percent to 2.0 percent, unemployment at 4.8 percent to 5.0 percent, and GDP growth at 2.5 percent to 2.7 percent. In the Macroeconomic Advisers' model, the BLS assumes that the Fed will adjust interest rates to push the economy toward the stated goals for inflation, unemployment, and GDP growth. For a discussion of the Fed's recent stances toward targeting inflation, see "Real Time Economics: Inflation Targeting Makes Fed Comeback," Wall Street Journal Blogs, Nov. 3, 2009, on the Internet at blogs.wsj.com/economics/2009/01/08/inflation-targeting-makes-fed-comeback (visited Nov. 18, 2009).
5. The Fed funds rate is the Fed's target for the rate banks charge other banks for overnight loans. More information on the rate can be found in "Open Market Operations" (Federal Reserve Board, Dec. 16, 2008), on the Internet at the Fed's Web site, www.federalreserve.gov/fomc/fundsrate.htm (visited Nov. 18, 2009).
6. The BLS follows the commonly held belief that 10-year Treasury yields reflect the market's forecast of future short-term interest rates. Because short-term rates cannot be cut below zero, it is logical to expect the spread between the Fed funds rate and the 10-year Treasury note yield to widen because future rates cannot be cut further, but must only stay flat or increase. Under a more normal interest rate environment, the spread would be narrower, as the market would be pricing in the possibility of both future rate decreases and increases, instead of simply pricing in increases.
7. Recently, much has happened in financial markets. Problems in the subprime lending market spread to other credit markets. At its August 2007 meeting, the Fed maintained the funds rate target at 5.25 percent, but turned quickly to concerns about the liquidity of short-term credit markets. Initially, the Fed intervened to increase liquidity through open-market operations. Then, on August 17, 2007, the Fed announced a 50-basis-point cut in its discount rate (the rate at which the Agency will lend to commercial banks), to 5.75 percent. Finally, the aforementioned half-percent funds rate cut to 4.75 percent came on September 18, followed by a cut to 4.5 percent in October.
8. See "Historical Changes of the Target Federal Funds and Discount Rates" (Federal Reserve Bank of New York, Dec. 22, 2008), on the Internet at www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html (visited Nov. 18, 2009).
9. See "Credit and Liquidity Programs and the Balance Sheet" (Board of Governors of the Federal Reserve System, Aug. 21, 2009), on the Internet at www.federalreserve.gov/monetarypolicy/bst_lendingdepository.htm (visited Nov. 18, 2009).
10. See "Credit and Liquidity Programs and the Balance Sheet" (Board of Governors of the Federal Reserve System, Mar. 26, 2009), on the Internet at www.federalreserve.gov/monetarypolicy/bst_crisisresponse.htm (visited Nov. 18, 2009).
11. See "Interest Rate Statistics: Daily Treasury Yield Curve Rates," on the Internet at www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield_historical_2008.shtml (visited Nov. 18, 2009).
12. See "Federal Reserve Statistical Release: Selected Interest Rates" (Federal Reserve Board, Aug. 31, 2009), on the Internet at www.federalreserve.gov/Releases/H15/20090831 (visited Nov. 18, 2009).
13. For a further discussion of population and labor force projections, see Mitra Toossi, "Labor force projections to 2018: older workers staying more active," this issue, pp. 30-51.
14. The Energy Information Administration produces the Annual Energy Outlook. More information can be found on the Internet at the Agency's Web site, www.eia.doe.gov/oiaf/aeo/index.html (visited Nov. 18, 2009).
15. See "Petroleum Navigator: Monthly Cushing. OK WTI Spot Price FOB" (Energy Information Administration, Nov. 4, 2009), on the Internet at tonto.eia.doe.gov/dnav/pet/hist/rwtcM.htm (visited Nov. 18, 2009).
16. Unconventional liquid fuels include gas-to-liquid biofuels (natural gas converted to gasoline or diesel fuel) and coal-to-liquid biofuels (coal converted to gasoline or diesel fuel), such as ethanol, as well as oil refined from extraheavy oil or oil sands
17. See "Issues in Focus," in Annual Energy Outlook 2009 (Energy Information Administration, 2009), pp. 28-55, especially p. 31, on the Internet at www.eia.doe.gov/oiaf/aeo/pdf/issues.pdf (visited Nov. 18, 2009).
18. See Appendix G, "Projections of Liquid Fuels and Other Petroleum Production in Five Cases: Reference; High Price; Low Price; High Economic Growth; Low Economic Growth," in Annual Energy Outlook 2009, pp. 225-44, on the Internet at www.eia.doe.gov/oiaf/ieo/pdf/ieopol.pdf (visited Nov. 18, 2009).
19. The Federal Government instituted several measures aimed at stimulating demand. The central bank brought down the Fed funds rate to less than 1 percent in late 2008. Although mortgage rates then fell, this stimulus was not enough to lure buyers back into the market. Also in 2008, the Government offered home buyers up to a $7,500 tax credit. Buyers were required to pay back the credit over the next 15 years, but no interest was charged. This allowance, too, did little to persuade buyers back into the market. Finally, in 2009, the Government offered a true tax credit of up to $8,000 for first-time home buyers. This program has been effective at increasing demand and has since been extended through mid-2010 on somewhat modified terms.
20. On the basis of national accounting identities, the national savings rate is calculated by adding the current-account balance (exports less imports, with net factor income added) to gross investment and dividing the resulting sum by GDP. In other words, the current-account balance is the mathematical difference of national savings and domestic investment. Thus, a decrease in the national savings rate reflects a widening of the external deficit.
21. It is important to note that the macromodel assumes that current health care policy will remain in place over the projection period. Recently, there has been much discussion regarding health care reform that, if implemented, could affect the projection significantly. There are bills in both the Senate and the House proposing radical changes to the current health care system. The Congressional Budget Office estimates that a similar plan would increase Government spending on health care, further contributing to the upcoming problems in this sector of the economy.
22. The Congressional Budget Office estimates that, left in their current situation, the Medicare, Medicaid, and Social Security programs alone would entirely crowd out all discretionary spending, including defense, education, and homeland security, by 2040
23. (See Overview of the President's 2009 Budget (Government Printing Office, no date), especially p. 7.), on the Internet at www.gpoaccess.gov/usbudget/fy09/pdf/budget/overview.pdf (visited Nov. 12, 2009).
24. For a discussion of defense spending and estimates of military force levels, see National Defense Budget Estimates for FY 2009 (Office of the Under Secretary of Defense, September 2008)
25. Fiscal 2010 Department of Defense Budget Release (Department of Defense, May 7, 2009)
26. In order to restore confidence in the financial sector, the Treasury Department was given the authority to purchase $700 billion of "toxic" assets through the Troubled Assets Relief Program (TARP). The Congressional Budget Office estimates that TARP injected roughly $247 billion into the economy in 2008. By June 6, 2009, approximately $432.7 billion had been distributed through TARP, including $85 billion to the auto industry and $69.8 billion to American International Group (AIG). Most of the remaining funds went to stabilize banks. (See TARP Transactions Report (U.S. Department of the Treasury, June 6, 2009)
27. Tranche Report to Congress (U.S. Department of the Treasury, January 2009)
28. The Troubled Assets Relief Program: Report on Transactions through December 31, 2008 (Congressional Budget Office, January 2009), on the Internet at www.cbo.gov/ftpdocs/99xx/doc9961/01-16-TARP.pdf (visited Nov. 12, 2009).)
29. The BLS projection of nearly $900 billion for the Federal budget deficit in 2018 is slightly lower than the Congressional Budget Office's March 2009 forecast of $1 trillion. (See A Preliminary Analysis of the President's Budget and an Update of CBO's Budget and Economic Outlook (Congressional Budget Office, March 2009), on the Internet at www.cbo.gov/ftpdocs/100xx/doc10014/03-20-PresidentBudget.pdf (visited Nov. 12, 2009).) In August 2009, however, the Office revised its forecast to $622 billion. (See The Budget and Economic Outlook, An Update (Congressional Budget Office, August 2009), on the Internet at www.cbo.gov/ftpdocs/105xx/doc10521/08-25-BudgetUpdate.pdf (visited Nov. 12, 2009).) The Office of Management and Budget expects the deficit to be $688 billion in 2018. (See Updated Summary Tables, May 2009: Budget of the U.S. Government, Fiscal Year 2010 (Office of Management and Budget, May 2009), on the Internet at www.whitehouse.gov/omb/budget/fy2010/assets/summary.pdf (visited Nov. 12, 2009).)
30. For further discussion on upcoming challenges to State and local governments, see State and Local Governments: Growing Fiscal Challenges Will Emerge during the Next 10 Years (U.S. Government Accountability Office, January 2008), on the Internet at www.gao.gov/new.items/d08317.pdf (visited Nov. 12, 2009).
31. See C. Alan Garner, A Perspective on the Low U.S. Saving Rate (Kansas City, MO, Federal Reserve Bank of Kansas City, Kansas and Missouri Forums, spring 2006), on the Internet at www.kansascityfed.org/SpeechBio/GarnerKSForum03-06.pdf (visited Nov. 18, 2009).
32. See "Personal Savings Rate" (U.S. Department of Commerce, Bureau of Economic Analysis, Oct. 29, 2009), on the Internet at www.bea.gov/briefrm/saving.htm (visited Nov. 12, 2009).
33. The measure of civilian employment used in the aggregate economic projections discussed in this article is a count of persons who are working. Estimates of civilian employment are derived from the Current Population Survey (CPS), a survey of households carried out for the Bureau of Labor Statistics by the Census Bureau. Payroll employment is a count of jobs and is based on the Current Employment Statistics survey (CES), a BLS survey of establishments. Although the employment measures from the two surveys show similar trends over the long term, shorter term differences have arisen. For further information on these two employment measures and on employment growth differences, see Mary K. Bowler and Teresa L. Morisi, "Understanding the employment meas-ures from the CPS and CES survey," Monthly Labor Review, February 2006, pp. 23-38; on the Internet at www.bls.gov/opub/mlr/2006/02/art2full.pdf (visited Nov. 12, 2009).
34. The BLS maintains a monthly update on CES and CPS employment trends on the Internet at www.bls.gov/web/ces_cps_trends.pdf (visited Nov. 12, 2009).
35. For more detailed information on labor productivity and employment, see Rose Woods, "Industry output and employment projections to 2018," this issue, pp. 52-81.
36. See also Labor Productivity: Developments since 1995 (Congressional Budget Office, March 2007)
37. James A. Kahn and Robert W. Rich, "Tracking Productivity in Real Time," Current Issues in Economics and Finance (Federal Reserve Bank of New York, November 2006)
38. "Productivity Growth," Economic Report of the President, the Annual Report of the Council of Economic Advisers, chapter 2, February 2007, pp. 45-62.