Assumptions to the Annual Energy Outlook 2002
Macroeconomic Activity Module
The Macroeconomic Activity Module (MAM) represents the interaction between the U.S. economy as a whole and energy markets. The rate of growth of the economy, measured by the growth in gross domestic product (GDP) is a key determinant of the growth in demand for energy. Associated economic factors, such as interest rates and disposable income, strongly influence various elements of the supply and demand for energy. At the same time, reactions to energy markets by the aggregate economy, such as a slowdown in economic growth resulting from increasing energy prices, are also reflected in this module. A detailed description of the MAM is provided in the EIA publication, Model Documentation Report: Macroeconomic Activity Module (MAM) of the National Energy Modeling System, DOE/EIA-M065(2002), (Washington, DC, January 2002).
Key Assumptions
The output of the Nation’s economy, measured by GDP, is expected to increase by 3.0 percent between 2000 and 2020 in the reference case. The growth in GDP can be decomposed into two key factors: the growth rate of the labor force and the rate of productivity change associated with the labor force. As Table 6 indicates, GDP growth is slower for the first five years of the forecast period, reflecting current economic conditions and revisions in recent history. Growth in the economy recovers for the remaining of the forecast period, primarily due to continued increases in productivity growth. The growth of the labor force depends upon the forecasted population growth and the labor force participation rate. The Census Bureau’s middle series population projection is used as a basis for the AEO2002. Total population is expected to grow annually by 0.8 percent between 2000 and 2020, with a higher rate of growth pre-2000 and a slower rate of growth post-2000. Over the forecast period, the labor force participation rate is expected to peak in 2011 and then decline as “baby boom” cohorts begin to retire. Combining population projections with labor force participation rates gives an increase in labor force earlier in the forecast horizon and then post-2000, the economy experiences slower growth as demographic trends affect future economic growth.
The productivity of labor is the second major reason for economic growth and reflects the positive effects of a growing capital stock of the economy as well as technological change occurring over time. A key to achieving the reference case’s long-run 3.0 percent growth is an anticipated recovery in productivity growth. Productivity growth slowed in the 1970’s, compared to the growth experienced post-World War II. There is no consensus about why productivity growth declined so much after 1973. However, between 1980 and 1990, business investment’s share of GDP declined at the same time that both the Federal budget deficit and the trade deficit increased. Since 1991, the economic recovery has been led by strong gains in business investment as a result of lower interest rates. Productivity has shown recent strong gains as economic output has increased more rapidly than employment gains.
In the reference case, GDP growth is slow for the first five years, reflecting current economic uncertainty, but growth recovers later in the forecast period. Business fixed investment rises as a share of GDP. The resulting growth in the capital stock and the technology base of that capital stock helps to sustain productivity growth exceeding 2 percent. This growth in productivity offsets some of the decline in the labor force growth, but the economy continues to slow down over time.
To reflect the uncertainty in forecasts of economic growth, the AEO2002 forecasts use high and low economic growth cases along with the reference case to project the possible energy markets. All three economic growth cases are based on forecasts prepared by DRI-WEFA.4 The DRI forecasts used in AEO2002 are the July 2001 Trend Growth scenario along with the February 1999 Optimistic and Pessimistic growth projections.
The high economic growth case incorporates higher population, labor force and productivity growth rates than the reference case. Due to the higher productivity gains, inflation and interest rates are lower compared to the reference case. Investment, disposable income, and industrial production are increased. Economic output is projected to increase by 3.4 percent per year between 2000 and 2020. The low economic growth case assumes lower population, labor force, and productivity gains, with resulting higher prices and interest rates and lower industrial output growth. In the low economic growth case, economic output is expected to increase by 2.4 percent per year over the forecast horizon.
The regional disaggregation of the economic variables uses regional shares based on a regional model solution. These shares change over time, but do not change as energy prices change from the projected reference price path.
URL: http://www.eia.doe.gov/oiaf/aeo/macroeconomic.html