Academic journal article Monthly Labor Review

The U.S. Economy: Framework for BLS Projections

Academic journal article Monthly Labor Review

The U.S. Economy: Framework for BLS Projections

Article excerpt

BLS projects a wide range for gross domestic product, accompanied by several key shifts in the composition of its demand components

The Bureau of Labor Statistics has prepared projections of the U.S. economy to the year 2005. As with prior BLS aggregate economic projections, three alternatives have been developed: low growth, moderate growth, and high growth. These alternatives are designed to examine a range of production possibilities over the next 13 years, based on different assumptions regarding those factors most open to question in future periods.

The moderate-growth projection is characterized by a gross domestic product (GDP) influenced by a very modestly slower labor force growth than currently exists, an improved balance of foreign trade, some improvements in labor productivity, several key shifts in the distribution of the demand components of GDP, and a gradually improving Federal budget balance. In comparison, the high-growth model has higher population, labor force, and labor productivity growth; marked shifts in demand toward investment and exports; and more optimistic foreign trade balances. Finally, the low-growth version contains a lower estimate of labor force growth and a continuation of recent trends in demand shares and labor productivity growth.

Under the assumptions used by BLS in developing these projections, by 2005, GDP is expected to range between $6.0 trillion and $7.3 trillion (in 1987 dollars). This translates to an average annual rate of growth for real GDP of 1.5 percent in the low-growth alternative, 2.2 percent in the moderate-growth scenario, and 3.0 percent in the highgrowth alternative over the 1992 to 2005 period, contrasting with a historical rate of 2.5 percent between 1979 and 1989. Real disposable personal income ranges between $4.5 trillion and $5.5 trillion, and disposable income per capita, in nominal terms (that is, current dollars), is projected to range between $35,000 and $44,800, compared with the 1992 level of $17,600.

Framework of the projections

More than 200 exogenous variables are provided to a macroeconomic model used to generate projections of the U.S. economy.2 A relatively small number of the assumptions contained within the variables significantly affect the long-term projections of employment and major demand categories of GDP.(3) These assumptions are summarized in table 1.

In addition, the projections are generally prepared with selected variables, such as the level of the unemployment rate, the rate of growth of labor productivity, the inflation rate, and the presence and severity of business cycle fluctuations, that are much more carefully evaluated than the other variables in the model. These target variables assist the Bureau in defining the important parameters for which alternatives are developed, but in no sense should they be considered fixed. Rather, they provide a test of reasonableness against which the overall projection results may be compared.

Major target assumptions were made regarding business cycle fluctuations in the 1990's. Critical reviews of past projection efforts have indicated that certain sectors of the economy, notably durable goods consumption and investment in equipment and structures, are overstated when no cycle is present. Consequently, to improve the accuracy of the projections, two recessions were assumed during the 1992-2005 period, in addition to the 1990-91 downturn. It is important that this assumption not be read as a prediction of recessions in any specific years, or even that there will be any recessions during 1992-2005. Rather, it is a realistic nod to the seeming inevitability of business cycle fluctuations and the impact they have on the distribution and levels of demand GDP components. It is also important to note that neither a downturn nor a recovery period is projected for the year 2005. That year represents, in the BLS projections, a year on the long-term trend growth path for GDP. …

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