Press Briefing on the Administration's Economic Forecast by CEA Chairman Ed Lazear Press Briefings 11:03 A.M. ESTCHAIRMAN LAZEAR: Okay, thanks a lot, Tony. Just to give you a briefoverview of the forecast. As you know, this is done in coordinationwith the Council of Economic Advisers, Office of Management and Budget,and Department of Treasury. We do this twice a year. And this is ourcurrent update. If we look at the forecast, the main number, kind ofthe headline number that people tend to focus on the most is the GDPforecast. And we have revised our GDP forecast down for next year byfour-tenths of a percent. So we are now forecasting 2.7 percent for2008, as opposed to 3.1 percent.There are two reasons for that. Primarily, the first reason is as aresult of having received some revisions in the data from the past fewyears, we found that our growth rate over the past few years wassomewhat lower than we thought it was, so that affects our estimates ofproductivity as we go forward.And the second thing that we have is thehousing market has been more pronounced -- the decline there has beenmore pronounced than we forecast at the time that we were doing ourmid-session review, and that's built into the forecast for next year aswell. Those two factors account for the difference that you see betweenthe earlier forecast and the forecast that we're coming out with now.Still, we are forecasting solid growth for 2008 -- 2.7 percent still isa good, solid growth rate, and that is especially the case given that wehave been hit with a pretty significant decline in the housing market.The other thing that you might notice is that the unemployment rate isforecast to rise to 4.9 percent. Again, that is consistent with theslowdown in the housing market, and the slowdown in the economy that isgoing to result from that. It should revert to what we think of as asteady-state rate of 4.8 percent as we move into the future.That's it, take your questions.Q I just wondered, sir, if the housing -- how has it changed -- weknew as of last summer that the housing market was bad. What do you seechanging here, and how much longer will it take before it turns around?When is the administration looking for a change in the housing outlook?CHAIRMAN LAZEAR: Well, we don't really forecast the specifics of whenthe housing market will turn around. What we do know, though, is evenif it were to turn around right now, because of the lags that areassociated with housing investment and with building, we would expectthe decline in GDP that results from -- GDP growth that results fromhousing to play out even over the next couple of quarters.So even if things were to sort of go back the other way right now, you'dstill expect some hit on GDP growth over the next couple of quartersfrom housing. So we expect that at least through the first half of 2008housing will have adverse affects on GDP growth.Q And what changed in the last six months that made it worse? Imean, has it just been that it's just not bouncing back as much? Areinventories -- are builders building too many?Do you have any reasonsfor why it's worse now than it was?CHAIRMAN LAZEAR: There's no specific reason that one can point to, butobviously the housing market has been softer than people expected. Ithink we are not the only ones who were surprised by that. Most of theforecasts, if you go back a year-and-a-half or so, you wouldn't be --have been forecasting a housing decline that was this pronounced. Thereare some exceptions, but for the most part, our revisions are in linewith other people's revisions as well, so I wouldn't point to any onespecific factor. It's simply that the housing market decline has beenmore significant than we expected.Q Hi, thank you. I'm wondering, your forecast on GDP, what are youassuming about interest rates?CHAIRMAN LAZEAR: Our interest rate forecast is actually in the table,and if you look at the 91-day interest rate, Treasury bill rate, whatyou will see is we are forecasting 3.7 percent for next year, going upto 4.1 percent. The 3.7 percent that you see for next year isconsistent with futures markets, so that tends to be what we do. Webuild in as much market information as we can into our numbers.As you go further and further out into the future, you don't have marketinformation for that. And there, what we are doing is just the standardanalysis of adding the rate of inflation, the forecasted rate ofinflation, to what we think of as the long-term real rate of interest.So you get a long-term real rate of interest that is somewhere around1.8 percent, add to that 2.3 percent forecasted inflation, and you comeout with 4.1 percent. So that's how we get there.Q Can I ask a quick question on unemployment rate?CHAIRMAN LAZEAR: Sure. Yes, go ahead.Q You know, so far the employment numbers have looked pretty good,even as the housing market is going down --CHAIRMAN LAZEAR: Yes.Q -- and you know anecdotally, we see in Cleveland, 6,000 peopleshowing up to apply for 300 jobs at Wal-Mart. One theory I had is thatwe have exported our unemployment, that a lot of people that have losttheir jobs in the housing market were undocumented workers. I wonder ifthere's any truth to that theory, or if you could explain why employmentgrowth has been so strong, why real personal income growth has beenstrong, and when you see an uptick in unemployment coming, does thatalso mean real personal income is going to go down?CHAIRMAN LAZEAR: Well, personal income growth has been strong. I thinkthat point is well taken. Real disposable income this year is up by 4percent. That's a pretty strong number, and I think it is beingreflected in the consumption numbers that we're seeing. I don't know --and we certainly don't have any independent evidence on undocumentedworkers. What we do know, of course, is that the labor market numbershave been volatile, so, you know, if your hypothesis were right, youcould track that by looking at what's happening in the labor marketnumbers. The trouble is, of course, the household survey labor marketnumbers tend to bounce a bit, so -- you know, over the summer we had ajump-up of -- I'm sorry, we had a down and then we had a jump-up ofabout a half million workers in one month. And so you see these thingsmoving all over the place.Unfortunately this is the kind of thing that it's hard to know at thetime. It's sort of the kind of thing that if you're -- if you have theluxury of being an academic, like I will be someday in the future,again, you know, you can study this ex- post, but if you're trying toforecast it at the time, it's pretty tough to do; you just don't havethe kind of data necessary to test your hypothesis. So it's areasonable conjecture, but I just don't have any evidence to give you onthat.Q Okay, thanks.Q I hear a lot batted around about where incomes are -- averageincomes, middle-class incomes -- since the year 2000. Could you justbroaden your focus a bit and talk about where incomes are and how muchthey have grown over the past few years?CHAIRMAN LAZEAR: What we tend to look at is average hourly earnings.And the reason I look at those is that average hourly earnings are forproduction workers; so that's the non-supervisory people, that tends tobe the people in the lowest 80 percent of the labor force, which is kindof the mainstream America. We've been seeing good, strong nominalgrowth in those wages really for about the past three years now. I'mthinking, when did it start -- it started about a year before I got here-- so I would say over the past three years we've seen good, strong wagegrowth there.Now, how that translates into real wage growth, of course, depends onthe current month's estimate of the inflation rate. And so that tendsto be a bit volatile, but the volatility is not the nominal part; thevolatility is all in the CPI part. The reason that's relevant, at leastto my mind, is that what I think of as being most important in terms ofindications of demand, is the nominal wage growth. And the reason forthat is this: what you want to do is you want to think in terms ofexpected wage growth, expected real wage growth; not actual, notrealized wage growth.So when employers are setting wages and they're thinking about, what doI have to do to attract workers, how much do I have to pay, I've got tomake sure that I pay enough in terms of real wages. But what they'regoing to do then is they're going to use the nominal wage rate minus theexpected rate of inflation, not minus the actual that turns out to bethe case a year later or so. And what that tells me is that the -- thatbecause the difference between nominal wage growth and expectedinflation has still been pretty strong, pretty significant -- you know,you're talking about somewhere in the neighborhood of one-and-a-half to2 percent -- it looks like demand is still there and the labor market isstill strong.So I would expect real earnings to continue to grow pretty much at aboutthe pace that we've been seeing through most of the past year, which isabout 1 percent. The last month, again, inflation ticked up, so we ateup some of that wage growth.Q Okay, and what about the broader arguments that some make about themiddle-class having lost ground, or being a thousand dollars lower thanthey were in the year 2000, for instance?CHAIRMAN LAZEAR: Well, again, you know, I just don't -- I don't thinkthat argument is correct, particularly if you look at after-tax income.When you look at the after-tax numbers, what you see is that the middleclass has done better than they were in 2000, and for many people by apretty significant amount. The other thing is that the population isn'tstationary. So if you ask, where was I in 2000, I might have been atthe 50th percentile in 2000, but where I am now is at the 55thpercentile. So the average individual, of course, has enjoyedsignificant income gains. And we tend to see that. You see that in thepolls, you see that in most of the micro-data results.So I think it is the case that people have done better. That said, Idon't want to simply deny the fact that we do have differences atdifferent parts of the income distribution. We know that the top hasgrown relative to the bottom. That's not a new phenomenon, that's beengoing on for the past 25 years, and it continued over the past fewyears, as well.Q Thanks very much.Q Good morning. Can you address what's happening in the creditmarkets, and how that is impacting the economy, and what the concernsare for going forward, what the impacts might be?CHAIRMAN LAZEAR: Sure. The credit market tightening that we've seencertainly is a concern. It's one that, obviously, we started thinkingabout many months ago, and it really reached a head in early August,which got everybody's attention. It seems to have gotten a bit worseagain in the past week or two, and so we're focused on that and lookingto see what happens.For the most part, that has not made its way into what I think of as thereal economy. I think many people are quite surprised by that, butprobably the best indicator that that's the case is looking at thenumbers that came out today on third quarter GDP -- you know, that wasalmost 5 percent. Two-thirds of that quarter came in after the creditevent that happened in early August. So you're getting a lot of actioneven after people were pretty concerned about credit, and it doesn'tseem to leak into much of the real economy.That said, obviously we're not complacent about it. We think thesethings eventually could have a significant effect. I think the reasonthey haven't had an effect in the short-run -- there are really tworeasons. One is, profits remain high, and as long as profits remainhigh, firms have plenty of cash flow, so they still have a lot ofcapital on hand to do the business investment.So we're not seeingbusiness investment contract as a result of the kinds of credit issuesthat we're seeing in the financial markets.The second thing I would say is, kind of going back to the previousanswer, the labor market still is strong. Unemployment is still low,wages are still continuing to grow, and as a result, people have moneyand they're spending it -- the real disposable income numbers, all ofthose numbers seem to be strong. So you're seeing that being reflectedin continued consumption growth.One of the things that we look at -- it's pretty tough to getcontemporaneous data on consumption, but one of the things that we dolook at are these weekly retail sales from chain stores. And thosenumbers have continued to grow at 2 percent to 2.5 percent pretty muchconsistently throughout this period.Q One other question, if I could. What oil price assumptions do youmake?CHAIRMAN LAZEAR: We don't -- we have about 400 variables that go intoour forecast, and we don't make any specific -- we don't talk about thespecifics that are associated with any one particular factor. But wecertainly do take market data into account, in thinking about oil pricesand any other factor.What I will tell you about oil prices is that we do know that rising oilprices do have a toll -- do take their toll on the economy. There are avariety of estimates on the size of the effect, but the way I thinkabout this is, but for rising oil prices, we would have had even largerGDP growth in Q2 and Q3; but the fact that oil went up to $90, $95 abarrel has an adverse consequence. We still were able to get throughit, primarily because our productivity growth was so high, but if thatwere to reverse, obviously oil prices would start to take their toll.Q Thank you.CHAIRMAN LAZEAR: Thank you.Q Yes, I have a couple of follow-ups. I just wanted to ask you aboutthe credit crunch -- Barbara's question -- is that it hasn't seemed tobe working into the real economy. But what about mortgages, and giventhat so much of consumer spending is based on your home and home equityand all of that?CHAIRMAN LAZEAR: Yes.Q And I have another follow-up too.CHAIRMAN LAZEAR: Okay. No, absolutely, I mean, that is the wealtheffect that people worry about; that what will happen is housing priceswill fall, the wealth associated with your -- the equity that you havein your home will fall, and consumption will fall as a result.Again,we haven't -- you know, at least as far as we can tell from looking atthe consumption data, we haven't seen any evidence that that hashappened, at least yet.Q And you're not worried about it for the fourth quarter?CHAIRMAN LAZEAR: Well, it's -- I mean, it's always a potential, but thedata on this suggests that those transmission effects are quite small.So if you have a 1 percent decline in housing wealth, that usuallytranslates into about 0.05 of a percent decline in consumption -- fiveto -- and at the upper bound, it's like 0.08 of a percent. So itdoesn't mean that -- you know, if you had a significant enough declinein housing prices, obviously it could have an effect on consumption --so I wouldn't say we're not concerned about it. It's certainlysomething that we think about and we take into account.But one of the things that I would point out -- and we've looked atthese data pretty carefully -- is that in those areas -- you know,housing price declines tend to be regional, so in some areas, housingprices are declining; other areas, housing prices are still growing.For example, the Pacific Northwest you're seeing pretty strong housingprice growth; places like Charlotte, you're seeing pretty -- Charleston,you're seeing pretty strong housing price growth.And so if you look at this stuff and you say, well, you know, how likelyis it that this is going to affect your expenditures, what we found isthat in those areas where housing prices are declining mostprecipitously -- for example, Miami, Los Angeles, Central Valley ofCalifornia -- those were also the areas where they had very stronggrowth over the past three years. So what that means is that thehomeowners in those areas still have a good bit of equity in their homesbecause most of them have been there for a few years and they haveenjoyed the run-up that they have had over the past few years.So evenwith some --Q So it's a paper loss that doesn't really affect the --CHAIRMAN LAZEAR: Well, I mean, it affects them, but you wouldn't expectit to affect them all that much, simply because they have a lot ofequity. They still have a lot of capital against which to borrow, so,again, that may mitigate the size of this wealth effect.Q The other question was Jim's question about the housing. We'veheard a lot of the differences -- it's a little bit in the weeds here --but the --CHAIRMAN LAZEAR: That's all right.Q -- household survey and the --CHAIRMAN LAZEAR: Payroll?Q -- payroll survey -- there's a lot of debate, and I'm wonderingwhat your thoughts are on which is more accurate. And then also thiseffect of oil, there's a debate about that. A lot of people say becauseit's -- we're more efficient than we were in the '70s, it's not as muchof a drag. And that seems to contradict a little bit with what you weresaying, or did I just misunderstand what you said?CHAIRMAN LAZEAR: Okay, on the second point, I'm not sure that I saidthat it wasn't a drag.The rising oil prices are certainly a drag onthe economy.Q No, no, you said it was a drag, but we often hear that because --we can withstand it now because we're more efficient than we were 20years ago.CHAIRMAN LAZEAR: Well, I think that's probably true, but it doesn'tmean that's it not a drag; it's just a question of how big is theelasticity. The effect is negative, it's just a question of the size ofthe effect. So I think both statements are still potentiallyconsistent. I wasn't really talking about the difference between theeffect now and the effect then. All I was saying is that the effect isnegative, but for that we would have even stronger GDP growth.Thereality is we're able to shake it off.I mean, you tend to see this -- I'm sorry, I'm going to just switch to aslightly different, but related topic -- you tend to see this in oureconomy. Because this economy tends to be very flexible and veryresilient, when one sector declines, another sector tends to grow. Thebest example of that is when you look at residential versusnon-residential construction. So residential construction declines andyou see non-residential construction pick up -- that's not an accident.That's because the labor and capital that is released fromnon-residential construction can easily move into -- sorry, fromresidential construction can easily move into non-residentialconstruction because they're pretty good substitutes for one another.And the fact that the economy is pretty flexible allows that to happen.Same thing is true with oil. You know, oil is demanded prettyinelastically -- we don't have a lot of good substitutes for it -- butthe ability of the economy to move away from using those particularfactors is still stronger than in most economies. And as a result weseem to be able to weather these kinds of shocks pretty well.Q Right. And we have the housing question.I just -- I had asked, Iforgot -- we got sidetracked.CHAIRMAN LAZEAR: I'm sorry?Q The household versus --CHAIRMAN LAZEAR: Oh, the household versus payroll. They're used fordifferent purposes. The payroll data are more accurate. I think mostpeople believe the payroll data are more accurate in terms of actualjobs -- bigger sample, lower standard error associated with that. Thehousehold data, obviously, you need those for things like unemployment.So they're used for different purposes. It's pretty tough to comparethe two.Q Thanks.Q I wonder, the Federal Reserve, when they put out their projectionsa couple weeks ago, the range among the 17 governors and regional bankpresidents was that 2008 GDP is going to be between 1.6 percent to 2.6percent, which means that your 2008 projection is higher than the mostoptimistic of the Fed governors. Any thoughts on what either you knowthey they don't, or they know that you don't? (Laughter.)CHAIRMAN LAZEAR: We've tracked the accuracy of our forecasts and otherforecasts, and they're all in the same range, so we have about the sameaccuracy. The other thing we know is that we are within forecast errorof the other forecasts. So there are some years, like -- if you compareours, say, to the Blue Chip, for example, we're a bit higher than theBlue Chip at the beginning, then there are some years in which the BlueChip is higher than ours. But in terms of statistically significant,they still all seem to be within the same forecast error range.Q What might be going on in the ins and outs of your model that mightmake your expectation more optimistic than both the Fed and a lot ofprivate firms, for what they're expecting next year?CHAIRMAN LAZEAR: Yes, again, as I said, I mean, these models are verycomplicated. You're looking at something on the order of 400 variables.And it would be virtually impossible to figure out which one factor iscausing one number to be higher in one year than another. But the waywe think about it is, again, just sort of track what's the forecasterror associated with this, and if you're getting something like a pointor a point-and-a-half -- a percentage point or a percentagepoint-and-a-half standard error on these kinds of estimates, you know,then we're talking about being well within the range of forecast error.You know, our -- I mean this is, as you know, it's a pretty inexactscience. We try to do the best we can, but look at what happened thisquarter. I mean, no one was forecasting 4.9 percent GDP for Q3; thatwas way, way out of range. So sometimes we err on the downside,sometimes we err on the upside. This time we were pleasantly surprisedby forecasting too low.Q So you feel like there's no single assumption or way you'reapproaching these questions that accounts for the difference between howyou're viewing the economy and Wall Street and the Fed and other --CHAIRMAN LAZEAR: Not that I know of, not that I know of.Q Great.CHAIRMAN LAZEAR: Okay, thanks. All right, thank you everybody forjoining us today.END 11:32 A.M. EST Printer-Friendly Version Email this page to a friend Afghanistan
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