Using Scenarios to Analyze the Economy

Using Scenarios to Analyze the Economy

This piece was originally published in the December 2018 issue of electroindustry.

Don Leavens used a scenario approach to analyze current conditions in the electroindustry.

Employing a scenario approach in his annual economic outlook, NEMA Vice President and Chief Economist Don Leavens, PhD, analyzed the economic growth impact of monetary policy, investments, productivity, and trade.

He explained that the first scenario, dubbed “Recession,” is based on the assumption that rising interest rates expose an overextended commercial real estate market causing real estate values to slide and business confidence to plunge. His second scenario, “Animal Spirits,” assumed that business confidence soared, resulting in increased investment, higher productivity, and faster economic growth. Lastly, he presented a more neutral scenario, “Goldilocks,” which alluded to economic growth that is neither “too hot nor too cold.”

He commented that of the three scenarios, the Goldilocks scenario was the most likely. He noted that by watching several economic variables over the course of the next year, the audience could determine which of the growth scenarios was occurring. A downturn in construction and a reversal in the Federal Reserve’s interest rate policy were signs the economy could be heading towards recession. Higher productivity and acceleration in economic growth would herald the Animal Spirits scenario. Meanwhile, a steady progression in interest rate hikes and continued modest construction growth would be signs the economy might be levelling to a sustainable pace featured in the Goldilocks scenario.

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