Forecasting the Economy’s Ups and Downs

How do we make sense of America’s wild economic ride? Economist Fred Joutz explains the good, the bad and the unpredictable in economic forecasting.

chart of a blue arrow and a yellow arrow pointing upward on a blue background
March 13, 2019

Employment is up, but wages are stagnant. Growth is steady, but Wall Street is on a roller coaster ride. GDP growth is robust, but the deficit is staggering. Are we living in an age of unrivaled economic prosperity? Or unprecedented economic inequality?

It doesn’t take a PhD in macroeconomics to make sense of our topsy-turvy economic environment—but it doesn’t hurt. In a recent interview, Fred Joutz, professor of economics and co-director of the GW Research Program on Forecasting, tried to make sense of it all. Joutz has served as an economic consultant and technical expert to the U.S. Energy Information Administration for nearly 30 years. His research focuses on economic modeling and forecasting, and he contributes quarterly forecasts to the Federal Reserve Bank of Philadelphia, the Survey of Professional Forecasters and the Economic Survey International ESI by the CES/IFO Institute. In addition, he has been an associate editor of Energy Economics and the International Journal of Forecasting.

Q: How would you describe our economy right now?

A: The best way to look at the economy is always through an individual’s perspective. Is it a good economy? Well, if you feel secure in your job; if your family has enough income to meet its expenses; if debt isn’t a big issue for you; if you’re not worried about next paycheck; then, yes, it’s a good economy.

But if you don’t have a job or you’re working only part time; if you’re not being trained to improve your skills and your value to employers; if you are struggling to pay rent, buy food, meet your medical expenses; then, of course, it’s not a good economy.

Q: Are those distinctions any more or less prominent today?

A: When I look at macroeconomic data, I ask: Where are we today and what has the economic performance been over the last five to 10 years. Since the recession of 2008-09, the economy has grown every quarter but two. The average growth rate has been about 2.3 percent. [At press time, the U.S. Commerce Department reported a 2.9 percent growth rate for 2018.] That’s below what it was in the ’90s, but it’s steady if not spectacular growth. On the employment side, there’s been fabulous news. Since the recession, we have had positive jobs increases for 107 months, creating almost 21 million new jobs. And the unemployment numbers just keep getting lower and lower—somewhere below 4 percent. We need to be a little careful with unemployment rates since you can be working just 10 or 20 hours a week and still be considered employed. Also, discouraged workers who have left the labor force and have given up looking for jobs are not included as unemployed. But, in terms of growth, employment and unemployment, this is all generally good news.

Q: And is there bad news?

A: Yes, there’s a flip side. If we look from about 1950 to 1980, the income rates of roughly the top 20 percent, the middle 60 percent and the bottom 20 percent of workers all grew at about the same rate. But from 1980 to 2016, there’s been a divergence—and a fairly sharp one. The middle 60 percent of the workforce have seen income growth of 30 percent. But if you look at the upper 20 percent, it has grown twice as fast as the middle—almost 80 percent. And the very top earners—the 1 to 5 percenters—have grown by 140 percent. Their incomes have more than doubled. That’s a shift in income trajectories that we hadn’t seen in the previous 40 years. And the gap just keeps getting wider.

Q:  Is the growing income gap a bad omen for the future?

A: One hypothesis says that the increases in income concentration and wealth will spur greater savings leading to higher investment, which will in turn lead to greater income growth for all. This is known as the trickle-down effect, if you will. But it’s not entirely clear that [hypothesis] holds. What is clear is that the middle 60 percent are not seeing real income. And it’s not likely to get better over the coming decades. So, is the fact that income and wealth accumulation is not consistent with everybody benefiting a stumbling block to the economy? The U.S. may be on a dangerous path creating schisms in society. I’m not going to say the house is on fire, but something is burning, and I don’t know if there are fire trucks nearby.

Professor of Economics Fred Joutz (Photo: Long Nguyen)
Professor of Economics Fred Joutz (Photo: Long Nguyen)

Q: How does the 2017 tax overhaul fit into this picture?

A: The full tax reform will lead to an increase in the national debt by about $1.7 trillion [by 2027] and the debt-to-GDP ratio will grow from 79 percent to almost 100 percent. Unless the tax cut leads to the investments that its supporters say it will, somebody has to pay for it in the future. In addition, the tax reform has led to large and growing government deficits. Macroeconomic policy since World War II indicates that this is being done at the wrong time in the business cycle. Expansionary fiscal policy is intended for economic downturns, not during economic growth periods like the U.S. is currently experiencing.

Q: Is your forecasting impacted by the stock market fluctuations?

A: Everybody ask economists about the stock market. They believe we have crystal balls. I would never bet my life on the fluctuations of the stock market for one day, one week, one month or one year to the next. Typically, we don’t use market fluctuations in economic forecasting because they are caused less by data than by perceptions of uncertainty. We are seeing a lot of rhetoric in this country that has made people uncertain. They aren’t sure what’s happening today or tomorrow or what may happen in the future. As well as anything else, that explains why the market has been so volatile.

Q: So from a macroeconomic perspective, is this a time of optimism or pessimism?

A: I’m always an optimist. Let me leave you with this thought: When we talk about improving the standard of living, in the long run what really matters aren’t more workers, more jobs or more investments. What matters are changes in technology and the accumulation of knowledge and innovation. And not just over years, but over generations. Right now, sitting in a university, observing how knowledge is sought and students learn, it’s easy to be an optimist.