Press Briefing on the Administration's Economic Forecast by CEA Chairman Ed Lazear
11:03 A.M. EST
CHAIRMAN LAZEAR: Okay, thanks a lot, Tony. Just to give you a brief overview of the forecast. As you know, this is done in coordination with the Council of Economic Advisers, Office of Management and Budget, and Department of Treasury. We do this twice a year. And this is our current update. If we look at the forecast, the main number, kind of the headline number that people tend to focus on the most is the GDP forecast. And we have revised our GDP forecast down for next year by four-tenths of a percent. So we are now forecasting 2.7 percent for 2008, as opposed to 3.1 percent.
There are two reasons for that. Primarily, the first reason is as a result of having received some revisions in the data from the past few years, we found that our growth rate over the past few years was somewhat lower than we thought it was, so that affects our estimates of productivity as we go forward. And the second thing that we have is the housing market has been more pronounced -- the decline there has been more pronounced than we forecast at the time that we were doing our mid-session review, and that's built into the forecast for next year as well. Those two factors account for the difference that you see between the earlier forecast and the forecast that we're coming out with now.
Still, we are forecasting solid growth for 2008 -- 2.7 percent still is a good, solid growth rate, and that is especially the case given that we have been hit with a pretty significant decline in the housing market.
The other thing that you might notice is that the unemployment rate is forecast to rise to 4.9 percent. Again, that is consistent with the slowdown in the housing market, and the slowdown in the economy that is going to result from that. It should revert to what we think of as a steady-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 -- we knew as of last summer that the housing market was bad. What do you see changing 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 when the housing market will turn around. What we do know, though, is even if it were to turn around right now, because of the lags that are associated with housing investment and with building, we would expect the decline in GDP that results from -- GDP growth that results from housing 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'd still expect some hit on GDP growth over the next couple of quarters from housing. So we expect that at least through the first half of 2008 housing will have adverse affects on GDP growth.
Q: And what changed in the last six months that made it worse? I mean, has it just been that it's just not bouncing back as much? Are inventories -- are builders building too many? Do you have any reasons for why it's worse now than it was?
CHAIRMAN LAZEAR: There's no specific reason that one can point to, but obviously the housing market has been softer than people expected. I think we are not the only ones who were surprised by that. Most of the forecasts, 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. There are some exceptions, but for the most part, our revisions are in line with other people's revisions as well, so I wouldn't point to any one specific factor. It's simply that the housing market decline has been more significant than we expected.
Q: Hi, thank you. I'm wondering, your forecast on GDP, what are you assuming 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, what you will see is we are forecasting 3.7 percent for next year, going up to 4.1 percent. The 3.7 percent that you see for next year is consistent with futures markets, so that tends to be what we do. We build 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 market information for that. And there, what we are doing is just the standard analysis of adding the rate of inflation, the forecasted rate of inflation, 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 around 1.8 percent, add to that 2.3 percent forecasted inflation, and you come out 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 people showing up to apply for 300 jobs at Wal-Mart. One theory I had is that we have exported our unemployment, that a lot of people that have lost their jobs in the housing market were undocumented workers. I wonder if there's any truth to that theory, or if you could explain why employment growth has been so strong, why real personal income growth has been strong, and when you see an uptick in unemployment coming, does that also mean real personal income is going to go down?
CHAIRMAN LAZEAR: Well, personal income growth has been strong. I think that point is well taken. Real disposable income this year is up by 4 percent. That's a pretty strong number, and I think it is being reflected in the consumption numbers that we're seeing. I don't know -- and we certainly don't have any independent evidence on undocumented workers. What we do know, of course, is that the labor market numbers have been volatile, so, you know, if your hypothesis were right, you could track that by looking at what's happening in the labor market numbers. The trouble is, of course, the household survey labor market numbers tend to bounce a bit, so -- you know, over the summer we had a jump-up of -- I'm sorry, we had a down and then we had a jump-up of about a half million workers in one month. And so you see these things moving all over the place.
Unfortunately this is the kind of thing that it's hard to know at the time. It's sort of the kind of thing that if you're -- if you have the luxury 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 to forecast it at the time, it's pretty tough to do; you just don't have the kind of data necessary to test your hypothesis. So it's a reasonable conjecture, but I just don't have any evidence to give you on that.
Q: Okay, thanks.
Q: I hear a lot batted around about where incomes are -- average incomes, middle-class incomes -- since the year 2000. Could you just broaden your focus a bit and talk about where incomes are and how much they 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 for production workers; so that's the non-supervisory people, that tends to be the people in the lowest 80 percent of the labor force, which is kind of the mainstream America. We've been seeing good, strong nominal growth in those wages really for about the past three years now. I'm thinking, 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 wage growth there.
Now, how that translates into real wage growth, of course, depends on the current month's estimate of the inflation rate. And so that tends to be a bit volatile, but the volatility is not the nominal part; the volatility is all in the CPI part. The reason that's relevant, at least to my mind, is that what I think of as being most important in terms of indications of demand, is the nominal wage growth. And the reason for that is this: what you want to do is you want to think in terms of expected wage growth, expected real wage growth; not actual, not realized wage growth.
So when employers are setting wages and they're thinking about, what do I have to do to attract workers, how much do I have to pay, I've got to make sure that I pay enough in terms of real wages. But what they're going to do then is they're going to use the nominal wage rate minus the expected rate of inflation, not minus the actual that turns out to be the case a year later or so. And what that tells me is that the -- that because the difference between nominal wage growth and expected inflation has still been pretty strong, pretty significant -- you know, you're talking about somewhere in the neighborhood of one-and-a-half to 2 percent -- it looks like demand is still there and the labor market is still strong.
So I would expect real earnings to continue to grow pretty much at about the pace that we've been seeing through most of the past year, which is about 1 percent. The last month, again, inflation ticked up, so we ate up some of that wage growth.
Q: Okay, and what about the broader arguments that some make about the middle-class having lost ground, or being a thousand dollars lower than they were in the year 2000, for instance?
CHAIRMAN LAZEAR: Well, again, you know, I just don't -- I don't think that 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 middle class has done better than they were in 2000, and for many people by a pretty significant amount. The other thing is that the population isn't stationary. So if you ask, where was I in 2000, I might have been at the 50th percentile in 2000, but where I am now is at the 55th percentile. So the average individual, of course, has enjoyed significant income gains. And we tend to see that. You see that in the polls, you see that in most of the micro-data results.
So I think it is the case that people have done better. That said, I don't want to simply deny the fact that we do have differences at different parts of the income distribution. We know that the top has grown relative to the bottom. That's not a new phenomenon, that's been going on for the past 25 years, and it continued over the past few years, as well.
Q: Thanks very much.
Q: Good morning. Can you address what's happening in the credit markets, and how that is impacting the economy, and what the concerns are for going forward, what the impacts might be?
CHAIRMAN LAZEAR: Sure. The credit market tightening that we've seen certainly is a concern. It's one that, obviously, we started thinking about many months ago, and it really reached a head in early August, which got everybody's attention. It seems to have gotten a bit worse again in the past week or two, and so we're focused on that and looking to see what happens.
For the most part, that has not made its way into what I think of as the real economy. I think many people are quite surprised by that, but probably the best indicator that that's the case is looking at the numbers that came out today on third quarter GDP -- you know, that was almost 5 percent. Two-thirds of that quarter came in after the credit event that happened in early August. So you're getting a lot of action even after people were pretty concerned about credit, and it doesn't seem to leak into much of the real economy.
That said, obviously we're not complacent about it. We think these things eventually could have a significant effect. I think the reason they haven't had an effect in the short-run -- there are really two reasons. One is, profits remain high, and as long as profits remain high, firms have plenty of cash flow, so they still have a lot of capital on hand to do the business investment. So we're not seeing business investment contract as a result of the kinds of credit issues that we're seeing in the financial markets.
The second thing I would say is, kind of going back to the previous answer, the labor market still is strong. Unemployment is still low, wages are still continuing to grow, and as a result, people have money and they're spending it -- the real disposable income numbers, all of those numbers seem to be strong. So you're seeing that being reflected in continued consumption growth.
One of the things that we look at -- it's pretty tough to get contemporaneous data on consumption, but one of the things that we do look at are these weekly retail sales from chain stores. And those numbers have continued to grow at 2 percent to 2.5 percent pretty much consistently throughout this period.
Q: One other question, if I could. What oil price assumptions do you make?
CHAIRMAN LAZEAR: We don't -- we have about 400 variables that go into our forecast, and we don't make any specific -- we don't talk about the specifics that are associated with any one particular factor. But we certainly do take market data into account, in thinking about oil prices and any other factor.
What I will tell you about oil prices is that we do know that rising oil prices do have a toll -- do take their toll on the economy. There are a variety of estimates on the size of the effect, but the way I think about this is, but for rising oil prices, we would have had even larger GDP growth in Q2 and Q3; but the fact that oil went up to $90, $95 a barrel has an adverse consequence. We still were able to get through it, primarily because our productivity growth was so high, but if that were 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 about the credit crunch -- Barbara's question -- is that it hasn't seemed to be working into the real economy. But what about mortgages, and given that so much of consumer spending is based on your home and home equity and all of that?
CHAIRMAN LAZEAR: Yes.
Q: And I have another follow-up too.
CHAIRMAN LAZEAR: Okay. No, absolutely, I mean, that is the wealth effect that people worry about; that what will happen is housing prices will fall, the wealth associated with your -- the equity that you have in 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 at the consumption data, we haven't seen any evidence that that has happened, 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 the data on this suggests that those transmission effects are quite small. So if you have a 1 percent decline in housing wealth, that usually translates into about 0.05 of a percent decline in consumption -- five to -- and at the upper bound, it's like 0.08 of a percent. So it doesn't mean that -- you know, if you had a significant enough decline in housing prices, obviously it could have an effect on consumption -- so I wouldn't say we're not concerned about it. It's certainly something that we think about and we take into account.
But one of the things that I would point out -- and we've looked at these data pretty carefully -- is that in those areas -- you know, housing price declines tend to be regional, so in some areas, housing prices are declining; other areas, housing prices are still growing. For example, the Pacific Northwest you're seeing pretty strong housing price 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 likely is it that this is going to affect your expenditures, what we found is that in those areas where housing prices are declining most precipitously -- for example, Miami, Los Angeles, Central Valley of California -- those were also the areas where they had very strong growth over the past three years. So what that means is that the homeowners in those areas still have a good bit of equity in their homes because most of them have been there for a few years and they have enjoyed the run-up that they have had over the past few years. So even with 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 expect it to affect them all that much, simply because they have a lot of equity. 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've heard 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 wondering what your thoughts are on which is more accurate. And then also this effect of oil, there's a debate about that. A lot of people say because it's -- we're more efficient than we were in the '70s, it's not as much of a drag. And that seems to contradict a little bit with what you were saying, or did I just misunderstand what you said?
CHAIRMAN LAZEAR: Okay, on the second point, I'm not sure that I said that it wasn't a drag. The rising oil prices are certainly a drag on the 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 20 years ago.
CHAIRMAN LAZEAR: Well, I think that's probably true, but it doesn't mean that's it not a drag; it's just a question of how big is the elasticity. The effect is negative, it's just a question of the size of the effect. So I think both statements are still potentially consistent. I wasn't really talking about the difference between the effect now and the effect then. All I was saying is that the effect is negative, but for that we would have even stronger GDP growth. The reality 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 a slightly different, but related topic -- you tend to see this in our economy. Because this economy tends to be very flexible and very resilient, when one sector declines, another sector tends to grow. The best example of that is when you look at residential versus non-residential construction. So residential construction declines and you see non-residential construction pick up -- that's not an accident. That's because the labor and capital that is released from non-residential construction can easily move into -- sorry, from residential construction can easily move into non-residential construction 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 pretty inelastically -- we don't have a lot of good substitutes for it -- but the ability of the economy to move away from using those particular factors is still stronger than in most economies. And as a result we seem to be able to weather these kinds of shocks pretty well.
Q: Right. And we have the housing question. I just -- I had asked, I forgot -- we got sidetracked.
CHAIRMAN LAZEAR: I'm sorry?
Q: The household versus --
CHAIRMAN LAZEAR: Oh, the household versus payroll. They're used for different purposes. The payroll data are more accurate. I think most people believe the payroll data are more accurate in terms of actual jobs -- bigger sample, lower standard error associated with that. The household data, obviously, you need those for things like unemployment. So they're used for different purposes. It's pretty tough to compare the two.
Q: I wonder, the Federal Reserve, when they put out their projections a couple weeks ago, the range among the 17 governors and regional bank presidents was that 2008 GDP is going to be between 1.6 percent to 2.6 percent, which means that your 2008 projection is higher than the most optimistic of the Fed governors. Any thoughts on what either you know they they don't, or they know that you don't? (Laughter.)
CHAIRMAN LAZEAR: We've tracked the accuracy of our forecasts and other forecasts, and they're all in the same range, so we have about the same accuracy. The other thing we know is that we are within forecast error of the other forecasts. So there are some years, like -- if you compare ours, say, to the Blue Chip, for example, we're a bit higher than the Blue Chip at the beginning, then there are some years in which the Blue Chip 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 might make your expectation more optimistic than both the Fed and a lot of private firms, for what they're expecting next year?
CHAIRMAN LAZEAR: Yes, again, as I said, I mean, these models are very complicated. You're looking at something on the order of 400 variables. And it would be virtually impossible to figure out which one factor is causing one number to be higher in one year than another. But the way we think about it is, again, just sort of track what's the forecast error associated with this, and if you're getting something like a point or a point-and-a-half -- a percentage point or a percentage point-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 inexact science. We try to do the best we can, but look at what happened this quarter. I mean, no one was forecasting 4.9 percent GDP for Q3; that was way, way out of range. So sometimes we err on the downside, sometimes we err on the upside. This time we were pleasantly surprised by forecasting too low.
Q: So you feel like there's no single assumption or way you're approaching these questions that accounts for the difference between how you're viewing the economy and Wall Street and the Fed and other --
CHAIRMAN LAZEAR: Not that I know of, not that I know of.
CHAIRMAN LAZEAR: Okay, thanks. All right, thank you everybody for joining us today.
END 11:32 A.M. EST
George W. Bush, Press Briefing on the Administration's Economic Forecast by CEA Chairman Ed Lazear Online by Gerhard Peters and John T. Woolley, The American Presidency Project https://www.presidency.ucsb.edu/node/277143