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Our Approach to Forecasting and Analysis
In one sense, Moody's Economy.com methodological approach to the analysis of the U.S. economy is quite standard: we build large-scale, simultaneous-equation econometric models, simulate them, and adjust them accordingly. At this point, our approach becomes radically different. Moody's Economy.com model of the U.S. macroeconomy is the only model that is both top-down and bottom-up. In Moody's Economy.com model, those variables that are national in nature are modeled nationally while those that are regional in nature are modeled regionally, subject to data availability. Thus, interest rates, prices, and business investment are modeled as national variables; key sectors such as labor markets (employment, labor force), demographics (population, households, and migration), and construction activity (housing starts and sales) are modeled regionally and then aggregated to national totals.
This approach allows for a richer set of information to influence the macroeconomic outlook while at the same time offering a wider variety of scenarios. Thus, changes in fiscal policy at the national level (changes in tax rates, for example) can easily be translated into their corresponding effects on state economies. At the same time, the growth patterns of large states, such as California, New York, and Texas, play a major role in shaping the national outlook. Our approach is not only intuitively appealing, but has the added advantage of explicitly recognizing that the U.S. economy is not a monolith, but the sum of fifty economies of varying size.
An important methodological difference in Moody's Economy.com regional modeling system is that each state's economy is explicitly linked to other states through migration flows and unemployment rates. Workers and families are mobile and tend to move from states where the economy is weak to states where the economy is strong; Moody's Economy.com model structure explicitly accounts for this.
