The document summarizes an economic forecast presented by Jay Harzell of the University of Texas at Austin to the Federal Reserve Bank of Houston. It outlines forecasts for US economic indicators such as GDP growth, unemployment, inflation and policy uncertainty for 2013-2016. Key points include: - GDP growth is expected to gradually increase from 2.2% in 2013 to 2.9% in 2016. - Unemployment will gradually decline from 7.5% in 2013 to 6.1% in 2016. - Inflation as measured by CPI will be around 2.0-2.3% through 2015. - Economic growth will continue to be slow due to household deleveraging and government spending

1. October 17, 2013
Federal Reserve BankHouston Branch
2014 Economic Forecast
Jay Harzell, Ph.D.
Professor of Finance, McCombs School of Business
The University of Texas as Austin

3. Economic Outlook 2014
Jay C. Hartzell
Chair, Department of Finance, McCombs School of Business
The University of Texas at Austin

4. Economic Forecasts
 Research Department, Federal Reserve Bank of
Philadelphia
 “Survey of Professional Forecasters”
 First quarter (August 16, 2013)
 Doing this since 1968
 42 “Professional Forecasters”
 Provide advice used by large commercial institutions
 Members of National Association for Business
Economics (NABE)
 Use a variety of techniques and assumptions to arrive
at forecasts

5. Real Gross Domestic Product
 Definition
 Historic average annual rate of growth
 ~ 3.0%
 Median forecasts (annual rate of growth)
2013
2014
2015
2016
2.2%
2.3%
2.7%
2.9%
 Risk of negative quarter (probability)
2013: Q3
2013: Q4
2014: Q1
2014: Q2
2014: Q3
10.5%
11.2%
11.7%
11.5%
11.8%

6. Unemployment & Workforce Participation
 Unemployment (natural rate ~ 6.0%)
2013
2014
2015
2016
7.5% (~12.5 million)
7.1%
6.6%
6.1%
 Under-employed (BLS “Alternatives”)
~ 12%-18%
 Workforce Participation Rate
2000
2008
2013
67.3% (143 million)
66.3% (154 million)
63.2% (155 million)
 Okun’s Law
~ 3.0% Real GDP Growth to reduce unemployment

7. Foundations of Low Growth
 Consumer spending and households




Stagnant incomes
High or under employment
Deleveraging
Uncertainty
 Business investment
 In aggregate, slim profit prospects
 Contraction in household and government sectors
 Uncertainty, particularly in government policy
 Government spending
 AAAAGGGGHHH! (debt-to-GDP ratio)
 Net Export
 Slowing global growth

8. Inflation (Consumer Price Index)
 Definition
 Historical average (annual rate)
 ~ 4.0%
 Median forecasts (annual rate)
Headline CPI
Core CPI
2013
1.4%
1.8%
2014
2.0%
2.0%
2015
2.3%
2.1%
 Long-term forecasts (annual rate)
Headline CPI
2012-2016
2.0%
2012-2021
2.0%
 Comments of Fed on controlling inflation
 Managing liquidity (e.g., bank and non-bank reserves)
 Commitment to inflation

9. View from 30,000 Feet (2013-2016)
 Slow growth
 Improving private sector balance sheets
 Deteriorating (dramatically) public sector balance
sheets
 High unemployment
 High under-employment
 Lower workforce participation
 Low interest rates
 Low-ish inflation
 More wealth re-distribution than creation
 Energy
 Health care
 Education

10. Latest Fed Forecasts

11. US Economic Policy Uncertainty Index

12. US Economic Policy Uncertainty Index
Econom ic Policy Uncertainty Index
Monthly US Econom ic Policy Uncertainty Index
Zoom
1m
3m
6m YTD 1y
All
200
175
150
125
100
75
Sep '12
Nov '12
1990
Jan '13
Mar '13
2000
May '13
Jul '13
2010
Highcharts.com
9/ 20/ 13 11:09 AM

13. Fed Policy: Growth and Inflation Forecasts

14. Texas Job Growth

15. Texas Leading Index