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Visualizations of Economic Scenarios
We illustrate individual paths of key economic variables over time for a sample of 16 scenarios. Additionally, we show the distribution of these variables at the end of each year, based on a larger set of economic scenarios.
To simplify the visualizations, we limited the economic scenarios to 4 years. The starting point (last actual) in these scenarios is Q4 2024.
Unemployment Rate Scenarios
The unemployment rate scenario paths vary from below 4% to 10%, with an occasional spike up to 11%. The paths are clustered below 5% during the first year of simulation and become more dispersed in later years. A few unemployment rate paths reach 8% to 11% at various simulation periods, indicating recessionary scenarios.
The distribution plot of unemployment rate scenarios confirms increasing dispersion observed in individual scenario paths (some years have a longer tail due to an outlier). The dense areas of unemployment rate distributions are mainly located between 4% and 5%. The lower point reaches 2.7%, while the high unemployment rate points are more diverse. The distributions reflect the entire spectrum of economic conditions, from full employment to severe downturns.
Inflation Rate Scenarios
The inflation rates are concentrated between 0% and 4%, with a few scenarios reaching a high inflation rate of 6% and beyond. Besides, several scenarios have a period of disinflation (inflation is positive but close to zero) or deflation (negative inflation, falling prices).
The mean values of the generated inflation rate scenarios are located within the 2.1% to 2.4% range. At the end of the first year, most paths are spread out between 0% and 5%. In the later year, the dispersion of inflation rate paths slowly increases. Some years have outliers with up to 10% inflation and down to -15% deflation.
Treasury 3-month Rate Scenarios
Historically, the Treasury 3-month rate closely tracks the Effective Fed Funds rate. In fact, the correlation between these two rates is 99%. The generated paths for the Treasury 3-month rate are mainly trending down. A few paths dip below zero for a short period. The decreasing interest rates are a response to slower inflation and potentially to rising unemployment. Near-zero rates are intended to stimulate economic growth in a recession or recovery phase post-recession. A couple of rate paths increase to 6% and beyond in the second half of the scenarios. The rising interest rates usually aim to conquer high inflation.
The distribution chart also demonstrates the decreasing trend of Treasury 3-month rate paths. The mean rate declines during the first half of the scenarios and settles at around 3.1% in the second half. In all years, a small portion of the interest rate paths dip into negative territory. Conversely, some paths rise above 6%, with a few reaching as high as 8% by the end of the simulation.
Real GDP Growth Scenarios
The real GDP paths are mainly concentrated around 2%-3%. Some scenarios feature periods of rapid economic growth, with GDP levels reaching 4% to 5%. Several scenarios with a negative GDP experience periods of economic contraction. A few scenarios even fall into a recession with lasting and deeper GDP declines. A couple of scenarios are similar to the COVID period (March 2020 and after) when GDP sharply dropped due to the lockdown and then quickly recovered due to the easing of the lockdown and government stimulus.
The distribution chart for real GDP growth shows a relatively stable mean hovering around 2.7%. A few paths penetrate negative territory representing economic downturns with various severity. On the other hand, a portion of real GDP paths increase beyond 4% representing booming economic scenarios.
S&P 500 Stock Market Index Scenarios
Overall S&P 500 (or SPX) scenarios exhibit a growing trend with some volatility at various simulation periods. In these sample scenarios, the largest quarter-over-quarter drop is 20% and the fastest quarterly increase is 23%. A few scenarios end lower or about at the same level as the starting point of the S&P 500 index. Most of the scenarios demonstrate various levels of growth during the simulation period reaching up to a 100% increase at the end of the simulation.
The distribution chart of the S&P 500 index shows an increasing trend and widening dispersion. A few paths sharply decline to 2,000 representing stock market crash scenarios. Conversely, a portion of S&P 500 paths rapidly rise to 12,000 and beyond, reflecting scenarios of rapid economic expansion.
House Price Index Scenarios
Unlike the stock market, the house price index (HPI) scenarios are much less volatile, reflecting the smoothness observed in the historical period. Most of the HPI paths are trending up, with the fastest path achieving a 40% increase at the end of the scenario. A few declining HPI paths represent stress scenarios decreasing up to 18% at various periods of the scenarios.
The distribution chart also demonstrates a growing trend of house price index. The dispersion of HPI widens with time. Interestingly, in all years, the HPI distribution has two humps. The larger one represents economic growth scenarios, while the smaller hump corresponds to housing downturns. The bimodal shape of these distributions is consistent with the HPI distribution observed in the historical data.
Stylized Facts in Economic Scenarios
So far we have illustrated distributions of individual economic variables. An essential aspect of simulated scenarios is maintaining the patterns and dynamics between economic indicators observed in historical data. This feature of the economic scenarios is often referred to as stylized facts.
We demonstrate several specific examples of generated macroeconomic scenarios and discuss the observed stylized facts.
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