覧覧覧覧覧覧覧覧覧覧覧覧覧覧覧覧

Monthly Discussion

 

 

The American Economy

 

There can be many indicators for the economy but some of the most frequently used are: GDP growth, unemployment, and interest rates. They are among the indicators reflecting the so-called fundamentals. Without going into the debate whether they do indeed present an accurate picture of the economy痴 health or not, I will venture here to forecasting them invoking natural-growth processes behind them. The historical window I consider extends back to the end of World War II thus comprising an integral chapter in the evolution of American economy.

The evolution of the GDP is shown in Figure 3. The agreement between the data and the fitted natural-growth curve is excellent. The post-war growth phase seems 65.4% completed by the end of Q2 of year 2002. And the forecast for the upcoming quarters is given in Table 1.

 

 

Exhibit 3. The purple line is an S-curve fit to the data. The goodness of the fit argues for the validity of the forecast.

 

 

 

Table 1

Year.qt

GDP

% growth

2002.q3

10382.84

0.9%

2002.q4

10472.07

0.9%

2003.q1

10560.55

0.8%

2003.q2

10648.26

0.8%

2003.q3

10735.17

0.8%

2003.q4

10821.27

0.8%

2004.q1

10906.55

0.8%

2004.q2

10990.98

0.8%

2004.q3

11074.55

0.8%

2004.q4

11157.26

0.7%

 

The evolution of employment is shown in Figure 4 in terms of the ratio employment over population. Another natural-growth process but this time following a cyclical path winding above and below the S-shaped trajectory. Interestingly, this growth process seems much closer to completion (91.3% completed). In the post-WWII US society the employment ceiling seems to be just about 2 out of 3 inhabitants. This is not unreasonable considering the fraction of the population (children, invalids, and senior citizens) not capable to work.

 

Exhibit 4. The evolution of US employment is cyclical around the S-curve that describes the post-WWII growth phase.

 

Extracting the cyclical variation as the ratio data to S-curve reveals a rather regular swing above and below the smooth trajectory, see Figure 5. In such cases a simple and accurate forecast is obtained via autocorrelation, namely by displacing the curve forward by one cycle (green curve in Figure 5). This way we can obtain a forecast for the variation, which when folded with the forecast of the general trend from Figure 4 gives the employment forecast shown in Table 2.

 

Exhibit 5. The green line is the black one displaced by one cycle. This way we obtain the forecast (red line underneath the green one)

 

Table 2

Year

Employment_to population ratio

Annual % change

2002

63.37983

-0.6%

2003

63.40474

0.04%

2004

64.05384

1.02%

2005

64.30176

0.39%

2006

64.45865

0.24%

2007

64.93283

0.74%

2008

65.11312

0.28%

2009

65.20382

0.14%

2010

65.30616

0.16%

2011

64.50939

-1.22%

 

Finally the evolution of interest rates in America are shown in Figure 6. Here the fitted curve is a bell-shaped one. The reasoning for this choice is that while an investment may grow along a natural-growth process (S-curve), interest rates reflect the rate of growth and thus follow bell-shaped curves (the S-curve痴 life cycle). Once again, we find that the process is rather complete (96%). The forecast for the general trend of the interest rates are shown in Table 3.

 

Exhibit 6. The purple line is a bell-shaped curve fit to the data.

 

Table 3

Year

Interest rate

Oct-02

1.83

Nov-02

1.81

Dec-02

1.79

Jan-03

1.78

Feb-03

1.76

Mar-03

1.74

Apr-03

1.72

May-03

1.70

Jun-03

1.69

Jul-03

1.67

Aug-03

1.65

Sep-03

1.63

Oct-03

1.62

Nov-03

1.60

Dec-03

1.58

 

CONCLUSIONS

The post-WWII niche of the American economy is a growth process well into its maturity. The GDP went through a maximum rate of growth in the 1990s and is now slowing down. We should not expect more than 0.8-0.9% growth in current dollars per quarter. The employment痴 most significant trend seems to be a 10-year cycle that approaches a minimum around the end of 2002 and beginning of 2003. And interest rates will have dropped by only another 25 percentage points by the end of 2003.

All this, unexciting as it may seem, corroborates the trend of the long-term forecast of the stock market (red line in Figure 1).

Could a war in Irak change things? Not unless its aftermath becomes as dramatic as that of WWII, thus creating another niche for growth.