Please develop capital market expectations, over the forecast horizon of the next 2 to 5 years for the following USA variables:
1. Real GDP
a. Most Recent Observation - Real GDP growth last year was down 3.5%
b. Central Tendency of Forecast The central tendency of the forecast is 2.5%
c. Range of Forecast The range of the forecast is between 2% and 4%
d. Longer Run Forecast The long run forecast is 2%
e. Methodology The methodology for this forecast is based heavily on historical context. Here population growth average around .8% a year. In this instance we will round up to 1% for ease of calculation. In addition, total factor productivity gains typically amount to 1% to 1.5% per year. Therefore, on a real basis, accounting for population and productivity gains, GDP should rise around 2% to 2.5% per year (Blanchard, 1997)
2. Unemployment rate
a. Most Recent Observation The most recent observation occurred in January 2022, with the unemployment rate being 4%
b. Central Tendency of Forecast Unemployment has averaged 5.8% from 1948 to 2022. Currently, the United States is below its historical average
c. Range of Forecast The range of unemployment varies dramatically due in part to underlying economic conditions. The lowest unemployment rate occurred in World War 1 at 1%. The highest unemployment rate occurred during the great depression and was 25%.
d. Longer Run Forecast Over the long run, I would expect unemployment to normalize to around 6%, in line with the historical average.
e. Methodology Currently, the employment statistics point to sustained low unemployment figures. As of February 2022, there are 10.9 million job openings with only 9.8 million available applicants. Over the long term, I expect this trend to reverse due to the overall business cycle turning more negative, additional layoffs and an overall normalization of business activity post the COVID-19 pandemic (Appleyard, 1992).
3. PCE Inflation
a. Most Recent Observation The most recent observation occurred in January 2022, where inflation was 7%
b. Central Tendency of Forecast The central tendency of inflation has been around 2% to 3% per year. Here, the federal reserve mandate has been long term inflation of 2% per year.
c. Range of Forecast - The range of inflation varies dramatically due in part to underlying economic conditions. The lowest inflation rate after the Great Recession and Housing Market collapse of 2008. Here inflation was roughly flat at -0.36%. The highest inflation rate occurred in 1980 and was 13%.
d. Longer Run Forecast Due to...
…of Forecast The 10-year treasury has a very large possible range of forecasts. Its low point was 1.8% in 2022. Its high point was 14.94% in 1980d. Longer Run Forecast My longer run forecast is between 2.5% and 3.5%
e. Methodology - The methodology behind this forecast a lower interest rate environment over the next 5 to 10-year period. Here, accommodative monetary and fiscal policy has created large demand for high yielding assets such as homes, apartments, real estate, and stocks. A rise in interest rates will dramatically decrease the value of these assets as has been seen in the recent taper tantrum that occurred a few years ago. Here, I anticipate a much more gradual approach to interest rate increases to minimize capital markets disruptions (McGrath, 1997).
7. US Treasury Rate _Real
a. Most Recent Observation negative 0.62% as of February 2022
b. Central Tendency of Forecast Central tendency has ranged from 2% to 3%
c. Range of Forecast The range has been from -.62% to 3%
d. Longer Run Forecast Long run forecast of real treasury rates at roughly 1% to 2%
e. Methodology Inflation is currently above historical averages. However, I anticipate inflation normalizing due to the variables mentioned in detail within the inflation section of the assignment.…
References
1. Appleyard, D.R., and Field, A.J. (1992) International Economics, Irwin, United States.
2. Blanchard, O. (1997) Macroeconomics, Prentice-Hall, United States
3. Cooper, N., and Scholtes, C. (2001) `Government bond market valuations in an era of dwindling supply', in The Changing Shape of Fixed Income Markets: A Collection of Studies by Central Bank Economists, BIS Papers, No. 5
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