Larry DeBoerDepartment of Agricultural Economics

Purdue University

August 22, 2014

GDP Unemp- Int. Rate Int. RateGrowth Inflation loyment 3 mo. T 10 yr T

Aug '14 for 2015 2.5% 2.1% 5.7% 0.3% 2.5%

Aug '13 for 2014 2.5% 1.5% 6.3% 0.5% 3.0%Actual 2014 2.4% 2.0% 6.2% 0.0% 2.5%Error 0.1% -0.5% 0.1% 0.5% 0.5%Forecast record since August '91 (23 August forecasts)Mean Error -0.1% 0.0% 0.1% 0.5% 0.4%Mean Absolute Error 1.1% 0.9% 0.6% 0.6% 0.5%

Mean error shows the average of the differences between forecasts and actuals.A big positive error and an equally big negative error would sum to a zero average. Over 23 forecasts, on average I underpredicted growth by 0.1 points.Mean Absolute Error shows the average of the absolute differences between forecasts and actuals. Over 23 forecasts, on average I missed GDP growth by plus or minus 1.1 points.

GDP Unemp- Int. Rate Int. RateGrowth Inflation loyment 3 mo. T 10 yr T

DeBoer (8/14) 2.5% 2.1% 5.7% 0.3% 2.5%CBO (2/14) 3.3% 2.0% 6.5% 0.4% 3.7%RSQE (5/14) 3.3% 1.7% 5.9% 0.3% 3.4%Prof. Fcstrs. (8/14) 3.1% 2.2% 5.7% 0.4% 3.3%Current: July/Aug 2014 2.4% 2.0% 6.2% 0.03% 2.5%

DeBoer: Larry DeBoer, Purdue University, August 2014CBO: Congressional Budget Office, February 2014RSQE: Univ. of Michigan Research Seminar in Quantitative Economics, May 2014Prof. Fcstrs.: Philadelphia Fed Survey of Professional Forecasters, August 2014

Component 2013-14 2015 Forecast

Consumption 2.3Res Investment 0.9Bsns Investment 5.7Government -0.7Exports 3.5Imports 3.9GDP 2.4

3.9% 2.8% 2.1%

August:79.1

May 2012: 79.3

Component 2013-14 2015 Forecast

Consumption 2.3 3.0Res Investment 0.9Bsns Investment 5.7Government -0.7Exports 3.5Imports 3.9GDP 2.4

“Seven Month Rule-of-Thumb”

Component 2013-14 2015 Forecast

Consumption 2.3 3.0Res Investment 0.9 7.5Bsns Investment 5.7Government -0.7Exports 3.5Imports 3.9GDP 2.4

AAA

BAA

Component 2013-14 2015 Forecast

Consumption 2.3 3.0Res Investment 0.9 7.5Bsns Investment 5.7 5.5Government -0.7Exports 3.5Imports 3.9GDP 2.4

Federal

State/Local

CBO ProjectionFY 2015:-2.1%

Component 2013-14 2015 Forecast

Consumption 2.3 3.0Res Investment 0.9 7.5Bsns Investment 5.7 5.5Government -0.7 0.9Exports 3.5Imports 3.9GDP 2.4

Exports

Imports

Chinese Yuan

European Euros

July update reduced projected growth by 0.3%

Component 2013-14 2015 Forecast

Consumption 2.3 3.0Res Investment 0.9 7.5Bsns Investment 5.7 5.5Government -0.7 0.9Exports 3.5 3.0Imports 3.9 5.0GDP 2.4

Component 2013-14 2015 Forecast

Consumption 2.3 3.0Res Investment 0.9 7.5Bsns Investment 5.7 5.5Government -0.7 0.9Exports 3.5 3.0Imports 3.9 5.0GDP 2.4 2.5

Indicator 2013-14 2015 Forecast

GDP Real Growth 2.4 2.5Unemployment Rate 6.2Inflation Rate 1.8Treas Int Rate 10 yr. 0.1Treas Int Rate 3 mo. 2.3

Indicator 2013-14 2015 Forecast

GDP Real Growth 2.4 2.5Unemployment Rate 6.2 5.7Inflation Rate 1.8Treas Int Rate 10 yr. 0.1Treas Int Rate 3 mo. 2.3

Indicator 2013-14 2015 Forecast

GDP Real Growth 2.4 2.5Unemployment Rate 6.2 5.7Inflation Rate 1.8 2.1Treas Int Rate 10 yr. 0.1Treas Int Rate 3 mo. 2.3

All Items

Core (less foodand energy)

Quantity Theory of Money◦ Rapid rise in quantity of money should produce

rapid rise in the inflation rate

Expectations-Augmented Phillips Curve◦ Years of unemployment above the NAIRU should

cause declines in the inflation rate; after 7 years we should see deflation

WRONG!

2002,2008

2003

2007

2001

2010

2013

Indicator 2013-14 2015 Forecast

GDP Real Growth 2.4 2.5Unemployment Rate 6.2 5.7Inflation Rate 1.8 2.1Treas Int Rate 10 yr. 0.1Treas Int Rate 3 mo. 2.3

In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases.

QE1

QE2

QE3

The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Taylor Rule:Unemployment—5.7Inflation—2.12002 2008

Indicator 2013-14 2015 Forecast

GDP Real Growth 2.4 2.5Unemployment Rate 6.2 5.7Inflation Rate 1.8 2.1Treas Int Rate 10 yr. 0.1 0.3Treas Int Rate 3 mo. 2.3 2.5

GDP Unemp- Int. Rate Int. RateGrowth Inflation loyment 3 mo. T 10 yr T

DeBoer (8/14) 2.5% 2.1% 5.7% 0.3% 2.5%CBO (2/14) 3.3% 2.0% 6.5% 0.4% 3.7%RSQE (5/14) 3.3% 1.7% 5.9% 0.3% 3.4%Prof. Fcstrs. (8/14) 3.1% 2.2% 5.7% 0.4% 3.3%Current: July/Aug 2014 2.4% 2.0% 6.2% 0.03% 2.5%

DeBoer: Larry DeBoer, Purdue University, August 2014CBO: Congressional Budget Office, February 2014RSQE: Univ. of Michigan Research Seminar in Quantitative Economics, May 2014Prof. Fcstrs.: Philadelphia Fed Survey of Professional Forecasters, August 2014