Terry Long Marymount University Gulf Coast Economics Conference October 2011

MBA Macroeconomics Premise Effective business decisions require knowledge about the future course of economic activity Knowledge about future course of economic activity requires theoretical framework to interpret and evaluate economic information Framework Circular Flow diagram

MBA Macroeconomics Theoretical Framework SR theory of determination of GDP, employment and interest rate in open economy Product sector (C+I+G+NX = Y) Financial sector (Md = Ms) Global sector (D$ = S$) General equilibrium Outcome Ability to interpret and evaluate current economic information using a relatively simple theoretical model Ability to evaluate professional forecasts

Qualitative Business Cycle Forecast Combining empirical information and a theoretical model to predict the direction and sustainability of a change in real GDP and employment (critical thinking skills) Combine SR product sector partial equilibrium (GDP = C+I+G+NX = Y) with current economic data to assess current status of business Combine SR product sector partial equilibrium with current economic indicator indices to foresee potential shocks Combine partial equilibrium theory of the financial sector with current interest rate and money supply data and FOMC reports to foresee potential shocks

Qualitative Business Cycle Forecast Combine partial equilibrium theory of exchange rate determination with Balance of Payments (international transactions) and exchange rates data to foresee potential shocks Using three sector general equilibrium theoretical model, current economic information and critical thinking, construct near term forecast for the direction and sustainability of GDP, employment and price level changes

Sample Assignment Your boss just recently read an opinion piece in the Financial Times (6/7/10) by Mort Zuckerman, Editor in Chief of US News and World Report in which he states ”This is an unnervingly jobless recovery.” On June 14 th, your boss read another opinion piece by Robert Samuelson (Washington Post) in which he references a “double dip recession”. Since your boss knows you are currently taking an MBA macroeconomic course, he/she asks you if the economy is likely to have a jobless recovery or a double dip recession. Knowing your boss has not completed a graduate course in macroeconomics you will need to provide your boss a succinct but methodical rationale of your assessment of the validity of these comments. To assess these predicted macroeconomic outcomes, you will need to construct your own short run forecast for the direction of GDP, employment and interest rates and explain it to your boss. To do this you will need to identify and articulate the theoretical model and empirical information you will use, analyze the impact of your selected empirical information in the context of the model assess the outcomes including the risks to your forecast. and conclude with an evaluation of the two comments informed by your analysis. To demonstrate the thoroughness of your analysis your sources should include a minimum of six professional/academic articles and several data sets. These sources should be cited in the narrative where relevant.

Assessment of Individual Learning As course assignment, individual student forecast assessed on demonstrated level of critical thinking Level I – Uses the theoretical constructs to systematically evaluate current economic activity and support basis for forecast of likely future path of the economy Level II – Compares several existing forecasts, describes basis for those forecasts and constructs “consensus” forecast Level III – Forecasts most recent economic activity forward

How accurate were students’ forecasts? For each near term period compare a majority student forecast and a minority student forecast with actual BEA and NBER data, and a “professional” panel forecast published by the National Association for Business Economics (NABE Outlook). Seven sets of student forecasts from Fall 2007 Summer 2008 Fall 2008 Spring 2009 Summer 2009 Fall 2009 Summer 2010

Most Interesting Results Fall % of students predicted a contraction beginning early 2008 NBER dates cycle peak at December 2007 Both majority (58%) student forecast and NABE Panel predicted slow growth in GDP NABE said no recession

Most Interesting Results Summer % of students predicted an on-going contraction NABE Panel forecast did not predict decrease in real GDP until November 2008 Fall % of students predicted the trough for 3 rd or 4 th Q of 2009 NABE Panel (75%) predicted trough end after 2 nd Q 2009 NBER dates trough at 6/09

Most Interesting Results Slow growth recovery (Summer and Fall ‘09 and Summer 2010) Percent of students predicting a U fell from 100% in Su ‘09 to 58% in F ‘09 to 42% in Su ’10 In Su ‘10 57% of students predicted a double-dip recession (W) and 100% continued jobless NABE Panel consistently predicted growth May 2010 NABE Panel predicted “above trend” growth in GDP and “robust” increase in employment and then revised down in October of 2010 BEA data show small positive growth in GDP beginning in 3rdQ 2009

General Observations Overall student forecasts as accurate (or inaccurate) as NABE Panel forecasts Effective learning tool Qualitative forecasts by students more pessimistic than quantitative forecasts by NABE Panel Illustrate difference between critical-thinking and statistics driven forecasting? “Inaccurate forecasts by independent and government economists that the recession and subsequent recovery would be “V-shaped” and the country would emerge from the economic doldrums more quickly was a big factor in failed recovery efforts, Peter Orszag, former director of the White House’s office of management and budget, said.” Financial Times article “Adviser weighs in on jobs act for US” by Johanna Kassel, 10/14/11.

Preview of the Future Summer 2011 Slow growth recovery predicted by 90% of students and continued jobless recovery predicted by 77% of students NABE Panel revised downward projection for economic growth and gradual improvement in labor market