The White House
President George W. Bush
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For Immediate Release
Office of the Press Secretary
June 8, 2005

Press Briefing with Dr. Harvey Rosen, Chairman, Council of Economic Advisers
Via Conference Call

2:35 P.M. EDT

MR. DUFFY: This is an on-the-record briefing about the economic forecast of the administration. As Scott said, it's a collaborative effort of the OMB, the CEA and the Treasury Department. And it's required so we can do the mid-session review and to also have an economic forecast twice a year. As Scott mentioned, I think, in the briefing, the reason we're doing it ahead of the mid-session review is because the data is fresh, and it's current. We wanted to get it out as soon as it was ready.

So with that, I will turn it over to Dr. Rosen.

DR. ROSEN: Thanks, Trent. There were a few major points I wanted to make about the forecast before taking questions. The first, I think, important point is that the updated forecast is pretty much the same as what we released in December of 2004 And it's consistent with the consensus of professional economic forecasters. I think the next important point is that the forecast confirms that the economic expansion has continued -- is expected to continue at a healthy and sustainable pace. Next, growing economies help budgets. However, new budget numbers will not be released until later this summer.

Now, I'm sure you're interested in the differences between this June 2005 forecast and the one that we issued in the summer of 2004, so let me tell you what I see as the differences, to the extent there are differences.

First, we're forecasting a slightly lower unemployment rate. It's expected to be now about .1 percentage point lower in 2005 and 2006 than we forecast back in December. And the reason for that is very simple, that the unemployment rate, as you know, has come in at 5.1 percent. It's lower than we expected and, therefore, it makes sense to modify our forecasts appropriately.

In the same way, average monthly payroll job growth has been slightly higher than expected this year, and therefore, we've revised upward a bit our estimates of total non-farm payroll employment in 2005 and 2006.

The third difference that you'll notice is that inflation is slightly higher in 2005 and 2006 than we had earlier forecasted. Again, this is based on what we've been seeing in recent months. But nevertheless, we expect it to maintain a moderate pace.

And finally, real GDP growth is forecast to be 3.4 percent instead of 3.5 percent from fourth quarter to fourth quarter. It's unchanged in 2006. The key point here is that we, like the private sector forecasters, are expecting economic growth to remain above its historical average.

I think with that, I'd be happy to take any questions you may have.

Q I was wondering about your forecast. You have the unemployment rate going to 5 percent, then remaining steady for a number of years after that. Is that standard way of practice, or would -- or you're just not forecasting in those future years, or what is that?

DR. ROSEN: That's our estimate of what a sustainable, long-term unemployment rate is. And I guess one point that's worth mentioning here is that we don't think of that long-term unemployment rate as a constant of nature like gravity. It's affected by public policy, and if we have policies that continue to enhance efficiency in our markets, then it could go lower. But we think that this is a sensible estimate of the long-term unemployment rate.

Q On your interest rate forecast, I noticed that you compare the '91 Treasury bill rate -- you said it was recently at 3.01 percent, which is virtually identical to the federal funds rate. And I see -- forecast that rising to 3.5 percent. I was wondering, what is your federal funds rate forecast implicit in this? Are you suggesting you think it's going to top out at 3.5 percent?

DR. ROSEN: Well, let me tell you a little bit about how we do the interest rate forecast. Basically, it's designed to be consistent with markets for financial futures. So, in effect, what we're expecting of that behavior is what the market expects, whatever that is. And so we're not making an independent guess on that, we're just saying, probably the best way to think about what interest rates are going to be in the future is to see what financial market participants believe, and that's how we came up with those numbers.

Q But so are you implying -- am I correct in inferring from this that you're implying that you expect the Fed funds rate to top out at 3.5 percent?

DR. ROSEN: No, all that we're doing here is not making any explicit assumptions about what the Fed is going to do. We're merely mimicking what the financial markets are saying about interest rates.

Q All right, thank you.

DR. ROSEN: Sure.

Q Hi, folks. Thanks for the question. A couple of quickees. First, can you explain to us what the originally-projected GDP inflation and consumer price numbers were prior to their revisions, and secondly, why the emphasis on the GDP number, when traditionally, I think, don't we usually focus on Consumer Price Index inflation numbers?

DR. ROSEN: So you're asking for what the CPI change was initially in the fall of 2004, versus the mid-session review numbers? That's the question?

Q Yes.

DR. ROSEN: For the CPI, in the fall, it was 2.4 percent, and now, for 2005, now it's -- oh, I'm sorry, am I reading the wrong number. Oh, sorry, we want -- I beg your pardon, I was reading the chart incorrectly. In the fall of 2004, we were projecting 2.0 percent for 2005; now in the mid-session review that's 2.9 percent. For 2006, the original quarter-to-quarter estimate was 2.3 percent, and now we are projecting 2.4 for 2006. So there's a small increase there.

Now, the second part of your question was about which --

Q GDP inflation versus CPI inflation.

DR. ROSEN: We're reporting both, so they're both important numbers and we report both.

Q Got it. Okay, thank you, that's enough.

DR. ROSEN: Hello?

Q Just to clarify, the non-farm payroll employment number, is that at the end of the year? So 133.6 -- the end of 2005, or is that an average for the year?

DR. ROSEN: It's an annual average.

Q Okay. And the second question was, what do you see as your major risks to your forecast?

DR. ROSEN: Major risks? I think one thing that could be a risk here is failure to get the federal government's deficit under control. And as you know, the President has proposed a budget that puts us on track to reduce the deficit in half by 2009 relative to the 2004 level. And if we don't make substantial progress in cutting the deficit, I think that that's a risk.

Another is the failure to keep taxes low. I think that higher taxes could have a substantial effect on the expansion. And I think another issue that's relevant here is openness to trade. I think that a vibrant trade environment is important for maintaining our growth, and we have to beware of any movement towards economic protectionism.

Q Dr. Rosen, you said in December -- in your December report that you expected oil prices would be slightly higher than the 2004 average of about $41 a barrel. Given that prices have been average this year about $50 a barrel, what is your -- what's your outlook for oil prices? And do you think we've seen the highest prices of the year?

DR. ROSEN: Well, we have about 400 variables in the model. The ones that we report are those that we think are most relevant for understanding the overall macroeconomic environment. So I think what makes sense to say about that is that when we're looking at producing our CPI estimates and our other inflation estimates for the GDP figure, we take into account all the price increases that we project out there and -- take them into account so there is a forecast embedded in the prediction. But we just leave that with the other 400 or so variables that go into making it.

Q You didn't mention oil as one of the risks going forward, so do you think we've seen the highest prices that we're going to see this year then?

DR. ROSEN: It's hard to say. Certainly increasing oil prices can create headwinds for the economy. They make households -- create some distress for households and for businesses. As the President said, there's no magic wand that he can wave to do something about that, but there are things we can do for the medium and long-term, including items in the energy legislation he's proposed.

Q One other question. Do you have any explanation for why long-term rates are staying lower than people have expected, while short-term rates are going up?

DR. ROSEN: No, sir, I don't have an explanation for that. As I mentioned before, we figure that the best we can do on the interest rate front is to take advantage of the information we see in the futures markets.

Q Thanks for taking the time. This is maybe a hard question to answer, but --

DR. ROSEN: Great.

Q -- is it possible for you to say what the effect would be on your deficit projection from the changes in these economic assumptions, all other things being held equal?

DR. ROSEN: No. I mean, the deficit numbers aren't even computed yet. OMB is working on that. We'll have some numbers later in the summer. So I wouldn't know how to conduct that exercise.

Q Okay.

Q Hi, good afternoon. Kind of going on the questions on oil earlier, how have the increase in energy prices -- how do you think that's affected the economy this year?

DR. ROSEN: Well, I think that increases in energy prices have created some headwinds for the -- our economy. And that's why it's important to take a look at policies that would allow us to explore new technologies for producing energy and for which there's legislative proposals out there. So I don't have a specific number, but I think that this has been an issue.

Q Consumers, small business, filling up the tank?

DR. ROSEN: Yes, it's hitting households, people who are trying to get to work in their cars. It has affected businesses. So it's certainly an issue.

Q What is the main factor in your slightly downward revision for GDP growth? And what is the main factor for the upward revision to the CPI?

DR. ROSEN: Well, I think the first thing to note about the change in the GDP growth, what we're talking about here for 2005 is a movement from 3.5 percent to 3.4 percent. So in the scheme of things, given the difficulties involved in doing forecasts at all, to a first approximation, they're really about the same. So there were technical factors involved in looking at how GDP growth has been moving. But the way I'd characterize it is just about the same, and at a number that's consistent with a healthy, stable expansion and consistent with what private sector forecasters would say. And I'm sorry, what other number were --

Q The CPI.

DR. ROSEN: Yes, well, again, that's -- just looking at the path of prices in recent months, that our starting point for the forecast is recent experience and there has been an up-tick in the CPI.

Q Well, how much of a factor was high oil prices in the GDP figure, the new GDP figure and the new CPI figure?

DR. ROSEN: Well, in the CPI figure, the increase in oil prices did play a role.

Q I wonder if it's possible to get your forecast of the current account deficit, and I wonder if that is maybe one of the risks to the economy. And then a sort of just totally unrelated and technical question -- how do you decide which sort of variables to use? You mentioned you use the markets to dictate what your assumptions are about the interest rates. You said you generate your own forecast for oil, even though you do have some market information there. How do you decide which variables to sort of just take what the markets are saying, and which variables are to take what oil is saying? And in that vein, what do you about the dollar? Do you make a forecast on the dollar, or do you try to take what the dollar has been doing over the past six months, or some forward-looking thing?

DR. ROSEN: Well, with respect to balance of payments, that's certainly a figure embedded in the model. But like a lot of the other 400 variables, we just don't report those. With respect to when we use market numbers and when we look at others, we -- in general, we look at both. We try and take into account what market participants are saying. And then our technical staff just decides under what conditions they think that those future markets are giving us the very best information, or in what cases they have other evidence that that might be useful instead.

Q And what do you do with the dollar? Or what do you do with the dollar in this forecast? Did you use a market, or do you have your own forecast embedded?

DR. ROSEN: Well, the analysts take their best crack at it using all the information that they can get their hands on.

Q Right, and I guess -- back to the current account, I guess I understand you can't -- you don't give the forecast, but is that a risk for the economy, do you think?

DR. ROSEN: I think that, relative to the risks that I mentioned before, problems with deficit, issues of keeping taxes low -- open to trade, it's there, but given --

Q Given the other ones --

DR. ROSEN: -- yes, given what we're thinking, there's every reason to think that the expansion will continue.

Q Let me try to ask the deficit question a little bit differently. If the deficit is one of the risk factors -- the first one you listed, actually -- where might failure to tame the deficit show up in these forecasts that you showed us?

DR. ROSEN: Well, when OMB computes the deficit, they will use the conventions that they normally use to do that forecast. And they will take into account the President's proposals.

Q Well, but what I'm getting at is, what are the effects of the deficit, not the cause of the deficit.

DR. ROSEN: The larger deficits, other things being the same, can crowd out private investment, which is -- has consequences for the economy. It's hard to know how big that effect is, but virtually all economists believe it's there, and that's a good reason for taking seriously the notion of reducing the deficit.

Q I know you're not putting out your deficit projections yet, but it's striking that the tax revenues jumped as much as they did in the fiscal year so far, even though your economic projections have been -- the economy has played out more or less the way you had anticipated -- maybe a little softer, in fact, in one of the quarters. So my question -- on the individual side, I believe CBO said that individual tax revenues were running something like about 20 percent higher than they expected, or something like that. My question is, given the fact that your projections for growth and employment, and so forth, really aren't much changed, is there reason to think that this jump in revenues in the first part of the year might bounce back, that it's sort of been skewed for some obscure reason, and that it will revert back to a more normal line that's more in line with growth?

DR. ROSEN: Well, I think that what we're seeing -- again, the actual budgetary projections have not been completed yet. One can imagine it's partially explained by very strong growth of wages and salaries and profits and associated with the strengthening labor market. So that is -- within a given GDP growth, the composition can change and that may be what's going on. But again, I want to stress that we don't have deficit numbers out there yet. OMB is working on those and I expect them -- they'll be out later in the summer.

MR. DUFFY: Okay, thank you. That's all the time we have for questions. If you have any follow-ups, you can reach me in the White House Press Office. That number is 456-2580. Thanks again for calling.


END 3:01 P.M. EDT

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