Economics 240C Forecasting US Retail Sales

Group 3

Motivations: Forecasting US retail sales for the remaining months of 2004 to provide indicative evidence to explore George W. Bush’s claim of economic recovery. Forecasting US retail sales for the remaining months of 2004 to provide indicative evidence to explore George W. Bush’s claim of economic recovery.

Introduction: Retail Sales as an economic indicator: Retail Sales as an economic indicator: Consumer Confidence Consumer Confidence General Economic Performance General Economic Performance Business Cycle ‘Turns’ Business Cycle ‘Turns’

Data: Real Retail and Food Service data obtained from Fred II Real Retail and Food Service data obtained from Fred II Monthly Time Series from January 1992 to April Monthly Time Series from January 1992 to April Seasonally Adjusted Seasonally Adjusted

Initial Observations: Evolutionary Series Evolutionary Series Trend in mean Trend in mean Unit Root Test : SALES ADF Test Statistic % Critical Value Series: SALES Sample 1992: :04 Observations 148 Mean Median Maximum Minimum Std. Dev Skewness Kurtosis Jarque-Bera Probability

Stationarity Difference Data into fractional change to achieve stationarity: Dsales = Sales – Sales(-1) Difference Data into fractional change to achieve stationarity: Dsales = Sales – Sales(-1) DSALES Series: DSALES Sample 1992: :04 Observations 147 Mean Median Maximum Minimum Std. Dev Skewness Kurtosis Jarque-Bera Probability

Correlogram and Root Test

September 11th Large Spike in series between September and October 2001 Large Spike in series between September and October 2001 Intervention Model needed for this one off event. Intervention Model needed for this one off event DSALES After achieving an approximately stationary series:

Intervention model We use time dummies to model the pulse function for the September 11 th 2001 event. We put in dummies for the months of September, October, November of We use time dummies to model the pulse function for the September 11 th 2001 event. We put in dummies for the months of September, October, November of So our model becomes an intervention model. So our model becomes an intervention model.

Model Estimation I

Model I Residuals Series: Residuals Sample 1992: :04 Observations 140 Mean Median Maximum Minimum Std. Dev Skewness Kurtosis Jarque-Bera Probability

Model Estimation II

Model II Residual Comparing the residuals of model II with those of model I, there is an improvement in the Jarque-Bera statistic. This shows that the ARCH/GARCH improves the model. Comparing the residuals of model II with those of model I, there is an improvement in the Jarque-Bera statistic. This shows that the ARCH/GARCH improves the model.

Diagnostic of the model The actual-fitted residual graph shows that the model tracks the observations well, especially the large spike due to the 9/11/2001 event. The actual-fitted residual graph shows that the model tracks the observations well, especially the large spike due to the 9/11/2001 event.

Note: The pulse function is highly significant The pulse function is highly significant Equation as a whole highly significant Equation as a whole highly significant Variance Term Arch(1) included to improve Kurtosis of model’s residuals Variance Term Arch(1) included to improve Kurtosis of model’s residuals Lack of structure or significant spikes in residual correlogram Lack of structure or significant spikes in residual correlogram

Forecast of dsales for 2004:05 to 2004:12

Forecast of retail sales

Conclusion Our forecast shows the difference in retail sales is not going to fluctuate very much in the rest of Our forecast shows the difference in retail sales is not going to fluctuate very much in the rest of The absolute value of retail sales will continue its upward trend. The absolute value of retail sales will continue its upward trend. Whether it signals economic recovery is rather unclear and it will make President Bush reelection campaign less certain too. Whether it signals economic recovery is rather unclear and it will make President Bush reelection campaign less certain too.