While we provide hundreds or even thousands of real-world economic scenarios with any starting point, we illustrate a small sample of 16 macroeconomic scenarios below. The starting point (last actual) in these scenarios is Q4 2023.
Unemployment Rate Scenarios
The unemployment rate in these scenarios varies from below 4% to 10%, with an occasional spike up to 11%. This range illustrates the full spectrum of economic conditions, from full employment to severe downturns.
Inflation Rate Scenarios
The inflation rates are concentrated around 2.5% 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).
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 simulated Treasury 3-month rates range from just below zero to 6% and beyond. The rising interest rates usually aim to conquer increased inflation. On the other hand, decreasing rates are a reaction to the increasing unemployment rate which is a recessionary signal. Finally, near-zero rates are intended to stimulate economic growth in a recession or post-recession recovery phase.
Real GDP Growth Scenarios
The real GDP is mainly concentrated around 2%-3%. Some scenarios feature periods of rapid economic growth, with GDP levels around 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. One of the scenarios is 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.
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 30% 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 76% increase at the end of the simulation.
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 43% increase at the end of the scenario. A few declining HPI paths illustrate stress scenarios. The lowest path downswings 12% then slowly recovers towards the end of the scenario.
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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