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 Home > News & Policies > December 2004

For Immediate Release
Office of the Press Secretary
December 17, 2004

Press Briefing by Telephone Conference Call with Dr. Greg Mankiw, Chairman of the Council of Economic Advisors

12:10 P.M. EST

MS. BUCHAN: Hi, everybody. It's Claire Buchan. I just wanted to welcome you all. This is on the record with Dr. Greg Mankiw, who is Chairman of the Council of Economic Advisers, who is going to highlight for you the administration's forecast for 2005, and then will be happy to take some questions.


DR. MANKIW: Thank you very much. This is Greg Mankiw. I hope all of you have in front of you the press release that includes that table of the new administration forecast. What you can see in the table is that economy is in very solid shape. When I was a professor of economics, I told my students to keep an eye on three indicators of economic performance -- GDP, inflation, and the unemployment rate. And by all three measures, the economy looks like it's very sound. GDP growth in our forecast for 2005 is at 3.5 percent from the fourth quarter to the fourth quarter of 2005. Inflation is running at about 2 percent, and the unemployment rate is expected to be 5.3, which is slightly under what it has been most recently -- 5.3 is the average for 2005.

The forecast, if you compare it to other forecasts, is very similar to a consensus of private sector forecasters. When you talk to private forecasters, you'll get a range of different forecasts. And if you look at the range, you'll see we're pretty much in the middle of that bell curve. It's also very similar, I should note, to our mid-session review forecast that came out six months. So there's not any significant changes in how we see the economy than how we saw it last time we took a snapshot and looked ahead for the budget process.

Finally, let me just sort of note as to why we do this exercise. The administration comes out with a forecast twice a year. It's part of the budget process, and the reason we would -- we do the forecast so that the numbers can then go over to OMB and Treasury, and they can generate revenue and spending numbers in order to take a snapshot of the budget. And the macroeconomic forecast is an input into that process.

The most important macroeconomic data for that process is probably GDP growth, because GDP, that determines revenues, and therefore the budget projections. And the GDP growth that we see is for, like I said, 3.5 percent in 2005, and for 3.4 percent in 2006.

And with that introduction, I will take some questions.

Q Hello, there. Thanks for doing this. I know that you need to get a certain amount of growth just to keep up with growth in the labor force. You're projecting 175,000 jobs per month over 2005. How much above the growth of the population is that?

DR. MANKIW: Well, you're right that part of the forecast you see keeping up with growth in the labor force. I don't have an exact number for you on that, but since the unemployment rate is declining in the forecast, that the 175,000 per month is more than enough to keep up with growth in the labor force as reflected in the fact the unemployment rate is expected to decline to 5.3 percent in 2005, 5.2 percent in 2006, and then down to 5.1 percent in 2007. So we're expecting employment growth sufficiently above population growth in order -- labor force growth in order to get the unemployment rate down gradually over time.

Q Don't you need, what, about 3.25 to stay up with the growth in the labor force?

DR. MANKIW: 3.25 --


DR. MANKIW: Oh, real GDP. Well, it depends -- that depends on the productivity assumptions, as well. And you can see we have real GDP growing at about 3.5. So, again, that's a little more than potential, and that's why we have the unemployment rate declining. Growth in real GDP above potential is another reflection of declining unemployment.

Q Just one last thing for you, if I may, on this point. Obviously, the job growth has not been as much as you would have hoped because of productivity and any a number of other things. What is it that is keeping job growth from being any higher than you're projecting it?

DR. MANKIW: Well, the link between growth in GDP and growth in the number of jobs as measured by the payroll survey is largely productivity, as you pointed out. The productivity growth has been exceptionally strong the past few years. That's, of course, good news for the economy in the long run, because it's high productivity that leads to higher real wages and higher living standards. But it has meant that we've needed even higher real wage growth to get jobs growing again. And what we've done in this forecast is take into account the new productivity assumptions. But the economy has created 2 million jobs in the past year, and is expected to continue to create jobs at a healthy clip.

Q Greg, I was wondering if you have -- can give us an idea of what this growth means to the budget deficit?

DR. MANKIW: The budget -- this is the beginning of the process. We always sort of put the administration forecasts to bed in early December, that's always been the case. This, then, gets shipped over to OMB and Treasury. And they're in the process of using it to come out with budget numbers. But they don't -- we don't have budget numbers yet, and that's something that OMB will release as part of the budget.

What I will say, though, is that this forecast is not materially different from the mid-session review forecast. So from a macro perspective, there's not going to be major changes in the budget coming from the forecast, because that budget forecast has not changed significantly in the past six months.

Q I want to talk about the Social Security problem right now. You guys say that you want the private sector to be very much a part of this. How are you going to go about educating the public, especially minorities, on what to do with, what you're recommending, that they take out of their, what, checks or what they would put into Social Security? Also, what's the structure for that? Would they have something like, A, they want it to go into growth funds, B, they want it to go here or go there? Is there going to be any structure to that?

MS. BUCHAN: This is Claire Buchan. Let me just answer your question, because this is really a call on the economic forecast for 2005. I'll just say that the administration does plan, and the President has already begun an education campaign with regard to Social Security, and we expect that we'll reach all aspects of the American community. The President believes this is an important priority going forward, and you can expect that we'll have a very active education to minorities and all sectors of the American community.

And with that, we'll take the next question. If you have separate questions on this, you can call back, but this is really about the economic forecast.

Q Okay, this is on economics. What I want to ask, how does outsourcing fit into the forecast, with jobs going overseas?

DR. MANKIW: Well, when we put the forecast together we look at lots of factors, including trade patterns, oil prices, growth among our trading partners, which, in turn, affects demand for our exports. So the forecast is really a team effort from the Office of Management and Budget, Treasury, and the CEA, but they look at all facets of the economy and try to figure out how all the different trends going on in the economy are going to produce macroeconomic outcomes.

Q I wanted to know if the forecast included as a factor the transition costs for Social Security retirement accounts?

DR. MANKIW: Well, the forecast is a short-term forecast; it goes out to 2010. The Social Security policies that the President is developing and will announce are much longer-term. They're really only -- it's a generational -- and that's why when the Social Security Administration does their projections, they go out 75 years, and many people go out even farther, really, sometimes forever, in order to see what these long-term generational issues comprise. That issue will not -- it's not going to have a material effect on what the macro-economy is going to do over the next few years.

Q Well, I guess, as a follow-up, though, in the report that came out back in February, your economic report, you mention with respect to Social Security that reforms would lead to larger budget deficits in the near-term, although you anticipate small adjustments in the long-term. So in the short-term then, what is your projection of budget deficits attributable to Social Security reform?

DR. MANKIW: I don't have a number for you because the President has not announced a specific plan, which, of course, you need in order to come up with a specific number. But the President has reiterated his commitment to reduce the budget deficit in half over five years, and the forecast that we have is consistent with that commitment.

Q Well, in terms of that goal as far as meeting and cutting the deficit in half over five years, does that include any costs, whatsoever, in this proposal? Or is that going to be something that you're going to do off-budget?

DR. MANKIW: That's really a question for the budget, not for the economic forecast. That's something that really should be -- wait until the President's budget comes out.

Q In the forecast for overall inflation, you show it dropping rather dramatically in '05, from a 3.4 rate to 2.0. Is that an assumption that oil prices, energy costs won't be as high? And what are you assuming for oil prices next year?

DR. MANKIW: We don't make a public prediction about oil prices. I believe the Energy Information Agency does that, but we don't do that, the administration. But you're right that the drop in the CPI inflation from 3.4 down to 2.0 is -- which is a bigger drop than you see in the GDP deflator index -- just look at a table in front of you -- is largely a reflection of the fact that oil prices -- oil price inflation is going to come down, and has already come down. We've already seen oil prices well off their highs, and that will be reflected in the Consumer Price Index, as well.

Q Has there been any change in your long-term productivity growth forecast?

DR. MANKIW: Very little. Our long-term forecasts are pretty much the same. And if you look at the out-years you sort of see that -- so the growth, 3.1, is pretty much the same as you saw in the last forecast.

Q Because if you have lower employment growth this year than you had previously seen, that implies higher productivity growth than you previously would have seen.

DR. MANKIW: I'm sorry, are you talking about in the near-term -- I was talking about the long-term.

Q I guess I'm trying to see whether those near-term assumptions --

DR. MANKIW: That's right, our near-term productivity assumption has gone up a little bit, which, in turn, was reflected in the employment forecast.

Q Actually, I had a question about inflation, but I guess Marty already asked it. Can you just explain, I guess, a little bit about why -- in very simple terms -- your job growth predictions are the way they are?

DR. MANKIW: The job growth predictions are part of a broader forecast that includes GDP and productivity. And those sort of three pieces go together -- what's happening to the overall economy is measured by GDP, what's happening to output per hour of work, and what's happening to the number of people working.

And one of the patterns we've seen over the past few years has been the high productivity growth. And that's one of the things that's very hard to forecast going forward. But what we do expect is productivity growth to remain strong, perhaps not as strong as we've seen over the past few years, but strong productivity growth, and employment growth to continue as we've seen in the past year.

Q I wanted to follow up on what you said about job growth. You've talked a lot about productivity being a factor in job growth, not coming out quite as strong as you had expected. And I'm wondering if also there is some lingering caution on the part of employers, and if there is, what would you attribute that to?

DR. MANKIW: Well, I think the labor market is very much headed in the right direction. We've seen, in the past year, 2 million jobs created. The unemployment rate has come down from its peak of 6.3 percent in the summer of 2003, down to 5.4 percent. We expect the unemployment rate to continue declining. But there's also no question that there are things we can do to make the labor market and the overall economy stronger. And the President laid out, for the past two days at his economic conference, the very ambitious agenda he has to do that -- things like reducing the budget deficit through spending restraint, reforming the tort system so that the threat of frivolous lawsuits doesn't impede business expansion and job creation. So there are still -- there are things we can do, and there's an ambitious agenda in place precisely to ensure that the economy continues to expand and jobs continue to be created.

Q Back to the productivity question. Productivity growth has slowed in the last quarter or so, significantly, and there are certainly some analysts who believe that it may be sub-par next year, after that extended period where it was just off the charts on the upside. If that's the case, wouldn't your inflation forecast be a bit over-optimistic?

DR. MANKIW: Well, I think if you look at our inflation forecast, and you compare it to the sort of the consensus of the private sector forecasters, I think you'll find that it is very close. Indeed, I think if you look at any of these variables that are in front of you, you'll see they're all very close to the consensus of the private sector variables.

There's no question that the -- that things like productivity are very hard to predict. And there will be a range of opinion among the private sector economists. I think we find ourselves very much in sort of the middle of that bell curve in most of these variables.

Q I was wondering why you've decided to release all these budget assumptions now? In the past you've waited until the budget comes out. What's the drive to release them? Is it related to the economic conference we had yesterday and the day before?

DR. MANKIW: The timing of coming up with the forecast is the same as it's always been. The forecast is always at the beginning of the budget process for us because it's the starting point for the budget numbers. And so the forecast is always put to bed internally in December.

Last year there was some confusion because when the forecast was released as part of the budget and the Economic Report of the President, people were sort of comparing apples and oranges by looking at the forecast that really had been put to bed in early December based on November data. And we thought it would be useful for the world to see the forecast as soon as it was put to bed, and to be able to -- it was completed just recently. We thought, therefore, it would minimize the sort of confusion we saw last year in order to -- by -- it would minimize the confusion we saw last year by releasing it today rather than waiting until February.

Q Hi, Alex actually asked what I was going to ask, but I have a follow-up to it, as well. I'm just wondering, in deciding to release it earlier and give us a fresher forecast, has there been any thought to doing more updates throughout the year of your forecasts so that they stay more current?

DR. MANKIW: Well, we follow forecasts, so we look at the -- we're monitoring the economy on a very, very frequent basis, obviously on a daily basis. But the administration forecast is really part of the budget process, and the reason we have a forecast at all is to put out a budget. That's why we do it twice a year. There's the forecast you see in front of you which is part of the budget, and then there's the mid-session review forecast as part of the mid-session review budget that comes out in the summer.

But since there's no sort of budget documents produced between those intervals, there's no motivation for having an official public administration forecast. But, of course, they're always monitoring the economy and updating the President on how the economy is doing. It's just that we don't -- we don't sort of convene the troika process that involves -- the troika that involves Treasury, OMB and CEA -- in order to come up with an unofficial consensus forecast.

Q Hi, it's a follow-up to Alex's question. Would it be incorrect to read into it that you wanted to get this done before leaving, before February?

DR. MANKIW: Yes, that would be incorrect.

Q So you'll be here through February?

DR. MANKIW: I serve at the pleasure of the President.

Q Greg, follow-up to the last question. Is that at the pleasure of the President of the United States, or the president of Harvard? (Laughter.) You don't have to answer that one.

My question was, what do you expect from net exports next year? Trade, of course, has been a significant drag on GDP for the last year or two. Do you expect -- do you see that changing in the coming year?

DR. MANKIW: I don't think we put out an official forecast for the trade deficit.

Q But if you could just provide some texture or context about what you see on the international side.

DR. MANKIW: I think one of the big questions is to what extent countries abroad start growing their economies. One of the reasons we have a trade deficit is that the United States has been growing much more rapidly than the rest of the world. And if the rest of the world started growing more rapidly, the demand for our exports would pick up. That's one of the reasons why it's so important to sort of -- to open markets abroad for our products.

Q Can you just say yes or no whether you expect net exports to be a net contributor or a detractor from growth next year?

DR. MANKIW: No, I'm not going to answer that question.

Q Okay, thanks.

Q Just to clarify, the President's economic proposals that we've known about in years past, such as making the tax cuts permanent, are those factored into your GDP estimates where there's sort of macroeconomic feedback from the tax cuts that you're hoping to enact?

DR. MANKIW: The President's economic forecast is part of his budget, and the President's budget assumes the President's policies. And the President's policies include making the tax cuts permanent, so I suppose the answer to your question is yes.

Q And do you see positive feedback from making tax cuts permanent, for example, and so the GDP is higher as a result of that?

DR. MANKIW: Well, the GDP forecast is predicated on the President's policies, which include making the tax cuts permanent. And I do believe that making the tax cuts permanent is good for the economy.

Q Thank you.

MS. BUCHAN: Okay, thank you all, appreciate you joining us. And if you have any concluding remarks, Greg.

DR. MANKIW: Thank you very much. I appreciate your taking the time to listen.

END 12:32 P.M. EST