Macroeconomic Forecasting: An in depth look at how economic forecasting affects indicators such as inflation, interest rates, unemployment rates, and Gross Domestic Product.

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The study of economics has become more prevalent in recent days due to the plight of the current economy. "Macroeconomics is concerned primarily with the forecasting of national income through the analysis of major economic factors that show predictable patterns and trends, and of their influence on one another" (BusinessDictionary.com, 2009). This paper focuses on the macroeconomic forecasts prepared by the Federal Reserve Bank (FRB), the Mortgage Banker Association (MBA) and the National Association of Realtors (NAR). The economic indicators analyzed are inflation, interest rates, unemployment rates, and Gross Domestic Product (GDP). Included in the focus will be the comparison and contrast of the indicators, the relationship among the forecasts and the implications on organizations' operations over the next two years.

Economic forecasts are derived using a wide range of modeling and statistical techniques. Quite often, the data used while imputing these models vary, therefore a forecaster will achieve different results. For example, the FRB uses data from a panel of industry experts and uses the results to create a forecast based on the average of the data. This technique has its merits, but also receives some criticism as the resulting forecast may be a figure(s) that no panelist predicted. The Mortgage Bankers Association (MBA) and the National Association of Realtor (NAR) collect data sets based on their industry information. The two financial institutions then compare the results with historical data to create an economic forecast. This technique is similar to the Federal Reserve's method in that it takes data from industry insiders, but is less subjective because it takes just one set of figures to create a model.

The FRB was founded by Congress in 1913 and is the central bank of the United States (BGFRS, 2008). Initially, the FRB was responsible for providing the United States "with a safer, more flexible and more stable monetary and financial system" (BGFRS, 2008). In more recent years, the FRB's duties have expanded to include:1. Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.

2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.

3. Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.

4. Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system (BGFRS, 2008).

FRB forecasts reflect inflation rates, the GDP growth, unemployment, and interest rates thereby create a certain amount of dependence by other institutions based on those results. "The MBA is a national association representing the real estate finance industry" (MBA, 2009). The FRB influences "the monetary and credit conditions in the economy" (BGFRS, 2008) which directly influences the mortgage rates offered by the MBA and in turn influence the macroeconomic forecasting. Conversely, the NAR mission statement aims to promote profit success of its members (Realtor, 2009). Forecasting by the NAR is based on how well the MBA sees the economic future. The relationship between the three organizations is essentially dependent.

The indicators addressed by the forecasts are inflation, unemployment, gross domestic product, interest rate, and real estate. There is an inverse relationship between interest rates and inflation. When interest rates are low, more money is circulated and consumers tend to spend more. This increased spending triggers higher cost of goods and services which translates to higher inflation rates. On the other hand, when interest rates are high less money is in circulation...
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