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Council of Economic Advisors

Press Briefing by Council of Economic Advisors Chairmain Ed Lazear

Via Teleconference
June 6, 2007

4:02 P.M. (Local)

CHAIRMAN LAZEAR:  Thanks, everybody, for joining on the call.  I just want to briefly introduce the troika forecast.  As you know, the troika forecast is the administration's best estimate of the most important economic numbers for the next five years.  The team that puts that together is the Council of Economic Advisors, in conjunction with the Office of Management and Budget, and the Department of the Treasury.

The way we do this is we use a large amount of market and government data as input to our models.  These models are the standard kind of economic macro models that combine with statistical methods to derive the estimates.  The primary use of the forecast is to calculate budget numbers and any time we need to score any policy that we're thinking about for the future and how that will affect the economy forecast comes into play at that point.

Probably the most important number that I would focus on in this forecast is the change in our estimate of GDP for this year, for 2007, and that was revised downward, to 2.3.  That's primarily a result of the weak quarter that we had in Q1, in the first quarter.  We are expecting that to change in this quarter; we're actually expecting a pretty strong quarter right now.  Most of the signs that we've been looking at are very positive:  the job market is very strong; we've seen business buying, orders and shipments went up in April; industrial production has been strong; auto production has been strong; the ISM numbers are good -- and, in particular, some of the things that encourage me in the ISM numbers are that exports seem to have picked up and picked up at a pretty significant pace.  So that's what we were expecting to happen.  We were a bit surprised that exports fell off a bit in first quarter, so this seems more consistent with our expectation.

The market has been -- obviously, stock market has been very strong and the inventory situation looks good.  So all of these things suggest a strong second quarter, and we expect that to persist into the rest of the year.  So that should bring the low first quarter number up to a reasonable economic growth number for this year.

As we go forward, the forecast is basically in line with our long-term expectations of somewhere around 3 percent growth.  And I think other than that, the forecast that you see right now is not different in any major way from earlier forecasts that you've seen.

So why don't I stop there.

Q    I'm just wondering, this is used for the budget projections -- can you tell me, is this consistent with your latest budget deficit forecast, or do you expect any kind of revision one way or the other as a result of this?

CHAIRMAN LAZEAR:  Well, we don't actually release budget numbers at this point.  The budget numbers comes out about a month from now.  These numbers are used as input into the budget-making process.  So what will happen is these numbers will be taken and they will go over to Treasury.  The Office of Tax Analysis at Treasury scores these numbers and then come up with revenue estimates which coupled with OMB's estimates on expenses give us the budget deficit.  So you'll have those numbers when the Office of Management and Budget releases its report, I believe that will be early July.  And then you'll get a final estimate.  So these are really input into that, rather than output at that point.

Q    Okay, thanks.


Q    Thank you.  Dr. Lazear, I just wanted to recap, make sure I understand, that previously because of the poor performance on the first quarter you had projected GDP growth for 2007 at 2.3 percent.  But now, because of all the other indicators, you're thinking things look better, and you're predicting it will be closer to 3 percent for 2007.  Am I correct?

CHAIRMAN LAZEAR:  No, not quite.  No, we had a number of 2.9 percent for 2007.  That was our estimate going into this forecast period.  And we revised that down from 2.9 percent to 2.3 percent.  Now, you are correct in your statement that the rest of the year, you know, if you just said, well, we know what first quarter was, that was 0.6 percent, so that was a weak quarter.  In order to get to 2.3 percent you can figure out pretty much what we're saying for the next three quarters -- it has to average to 2.3 percent, coupled with that 0.6 percent.  So we are expecting that the rest of the year is going to be somewhere in the neighborhood of 3 percent, but we don't actually break that down quarter-by-quarter.

So we are expecting that for the year we'll come out with 2.3 percent, because we're expecting that this quarter will be strong and the following two quarters should also be strong.

Q    Good morning, Dr. Lazear; two energy related questions.  What impact have the higher energy costs had on the overall economy?  And why do you think they have not had a greater impact?

CHAIRMAN LAZEAR:  Well, energy prices obviously do have an impact on the economy.  They tend to have an impact on different groups in the economy, particularly low income individuals are hurt more by high energy prices, and that's a major concern to us, because what it means is that even if we don't see the big effects in the economy as a whole, that doesn't mean that it doesn't affect individuals.  So that's obviously a reason that we've always pushed to make sure that we have additional energy resources, going for alternative fuels and more supply, and so forth.  That's an important component of this.

But I think that in terms of the macroeconomic effect, which was, I think, the focus of your question, the U.S. economy has been very strong in its ability to fend off high energy prices.  It doesn't mean that it hasn't had an effect, it just means that the other factors have been sufficiently strong to offset the energy effects.  So even if you take the construction industry, which, obviously, we've had problems in the housing market -- there's been a significant decline there -- still, construction has been not so bad because nonresidential construction picked up and offset that. 

And we see the rest of that happening throughout the economy, as well.  So the service sector has grown at very high rates.  The service sector tends to be -- most of that service sector tends to be a little less sensitive to some of these energy prices. 

So we've been, because of the robustness of the U.S. economy, we've actually been able to survive high energy prices without a great deal of economic shock.

Q    Any inflation concerns at all because of the continued high energy costs?

CHAIRMAN LAZEAR:  Well, the high energy costs feed directly into the inflation numbers, of course, so when we're looking at the headline number, the headline number for inflation for this year is forecasted to be at about a little over 3 percent, and that is primarily because of energy prices.  So no doubt that energy prices have a direct impact on inflation.

The question is how does it affect our inflation forecasts for the year ahead.  And I think there we're a little less concerned about it.  First of all, we don't expect that the energy price increases will continue at the same rate that they have in the past few months.  And, second, the core rate of inflation has been pretty good.  It's down in the low two's.  And when you're looking at a core rate down in the low two's, that's a better predictor of long-term inflation in the headline numbers.  And so we're expecting that inflation will moderate, and that's reflected in the forecast that you see in terms of the lower inflation numbers for the future.

Q    Good morning, Dr. Lazear.  I wanted to get your thoughts on the housing sector.  What is your expectation in terms of how long you expect this slump to persist?  Do you think the worst is over?

CHAIRMAN LAZEAR:  Well, we know that there are some good indications in the housing market.  Obviously, housing has been a major drain on GDP growth.  It took off about a full percentage point last year from GDP growth.  And some of that still has -- will play out over the next few months, when you see housing starts down at the early part of the year.  We know that it takes a while for that to play out through the economy because a housing start doesn't translate into a completed house for a few months.  So we're going to see some reduction in the actual amount of investment in housing over the next couple of months.

To be honest, it's just not clear what's going on in the housing market.  There are indicators that suggest that things have bottomed out, housing starts are actually better than they were about six months ago; they're higher than they were about six months ago, so we're still at about 1.5 million housing starts per year.  The numbers on the building permits are not quite as encouraging, so it's just not quite clear where we are in terms of the housing market, whether it has bottomed out. 

But, again, some of the indications in the housing market are positive.  I guess the thing that I would look at is that the housing inventory came down, and came down quite substantially.  So the average inventory-to-sales was eight months, and now it's down in the six-month range, and that's a good sign for the housing market.  So there are some indications that things may be getting better there.  I guess I'd hedge it by saying it's still too early to tell.

Q    Good morning, Dr. Lazear.  Do these numbers suggest that the 4.8 percent (inaudible) estimate of (inaudible) employment?

CHAIRMAN LAZEAR:  Four-point-eight percent obviously is a good, solid number in terms of unemployment rates.  If we had long-term unemployment at 4.8 percent, that would be consistent with a low level relative to the historic average.  But it is consistent with the historic average; it's not out of range.  And we do believe that the 4.8 percent number is something that is attainable, in large part because I think that the ability to manage the economy -- and not just our economy, but the global economy -- has improved over time, the business cycles have become much less pronounced.

So we don't tend to see the kinds of major recessions that we saw in the past.  They just don't hit as hard.  So that's consistent with this long-term notion of a 4.8 percent unemployment rate.  And we do think that that is a sensible rate.

Q    Do demographics play a role?

CHAIRMAN LAZEAR:  Demographics don't really play a role in the unemployment rate, per se.  You know, there may be -- there's a slight indirect effect of demographics.  They do play a strong role in terms of employment growth.  So you do see that if you look to the -- what we have for non-farm payroll employment changes.  That does tend to taper off as you go into the future.  And that is primarily a function of demographics.  As we have an aging population, people moving into retirement ages, that's going to reduce the increase in the labor market.  So you do see that there.

It doesn't necessarily get reflected in unemployment.  Unemployment could be low either because you have a lot of people working or because you have a low number of people in the labor force.  We don't think either one factor or the other is going to dominate.  We think we're going to continue the balance, and that's why we've come up with the 4.8 percent unemployment rate.

Q    Hi, Dr. Lazear.  My question is on exports.  You said  at the beginning that you were surprised that export had declined in the first quarter.  And I was wondering, I guess they're -- you're expecting that to reverse the rest of the year?  And I was wondering if you could just comment on that, in general?

CHAIRMAN LAZEAR:  Sure.  Yes, we were -- I'll tell you why we were surprised that exports had declined, and that is exports are primarily a function, not of what we're doing, but what our trading partners are doing.  And their economies have looked pretty strong.  So we were expecting that the export numbers would be pretty good in the first quarter because the economies of the rest of the world had been pretty strong.  If you look at -- you know, the President right now is at the G8 meetings.  And if we look at the countries in the G8, they're doing better right now than they have in the recent past.  Germany is having a very strong year, the U.K. is having a strong year, France and some of the other countries that have had some weaker times are still up now at moderate levels.

All of that should translate into high exports for the United States.  And so the first quarter for that reason was a bit of a surprise.

Now, when we look at -- yes, when we look at the numbers that we see most recently, the March numbers were up, and that was why I mentioned that we were encouraged by exports.  That, coupled with the fact that when you look at these business surveys, business surveys also suggest that exports are up.

So, again, that would be more consistent with what we are seeing as the general picture in the rest of the world.  It just -- it seems to make a lot more sense.  So it looks like the first quarter, in terms of exports, was a deviation from the trend and not at the trend, and that's encouraging to us.

Q    Hi, I know you commented already on, kind of, the uncertainty of the housing market impact, but can you talk a little bit about the impact of the sub-prime failures, what impact that's had on the forecast, if anything?

CHAIRMAN LAZEAR:  Yes.  The sub-prime market obviously is something that we look at, and we're always concerned when we see  default rates go up in any market, for a couple of reasons.  One is, again, the effect on the macro-economy.  But the other is just the personal effect on individual's households -- losing their homes.  That's not a thing that we like to see happening.

That said, if you look at the sub-prime market, you have to remember and put this into context.  The sub-prime market, first of all, is a relatively small part of the mortgage market, and even within the sub-prime market, the number of households that have been at risk is a small part of the sub-prime market.  So it tends to be focused in the adjustable rate mortgages only, and it's only a small fraction of those.

So when you look at this as an overall share of the mortgage market, it's less than 1 percent of the overall mortgage market.  So that doesn't mean that it's not a concern, but it means that it's less of a concern in terms of a systemic risk for the macro-economy.

We don't think that has been reflected in other parts of the housing market, and we would be very concerned about the sub-prime market if we thought that that was an early indicator of what was happening elsewhere, that is if we felt that the sub-prime went first, but then the prime is going to go later, and then we're going to see other kinds of problems, as well.  It doesn't look like that's happening; we haven't seen any spread.  So we're encouraged by that.  We think that things are settling down and this is not going to be reflected in big changes in the macro-economy.

Q    And one other question.  Just so I'm clear, the change from your GDP forecast from this quarter to -- or from this forecast from six months ago is due only to the slow first quarter?  There's no other reason why you lowered it?

CHAIRMAN LAZEAR:  Well, I wouldn't quite say that.  I mean, you have to realize that these models use a very large amount of data, so there are -- you know, there are a significant number of variables that have changed.  But if I were going to point to the one factor that was the primary factor, I would say that the primary factor just mechanically is a fact that we had a weak first quarter.  So you just average that in and suppose that you continue to predict the same kind of growth for Q2, Q3, and Q4 that we had predicted earlier, without any change in those at all, just average in the first quarter, you're going to get a lower growth rate for the year.  So it's just pure arithmetic there.

Thank you.

                            END                 4:20 P.M. (Local)