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 Document>ation Report: Macroeconomic Activity Module (MAM) of the National Energy Modeling System, DOE/EIA-M065(2009), (Washington, DC, January  2009). 

Key Assumptions

The output of the U.S. economy, measured by GDP, is expected to increase by 2.4 percent between 2008 and 2035 in the reference case. Two key factors help explain the growth in GDP: the growth rate of nonfarm employment and the rate of productivity change associated with employment. As Table 2.1 indicates, real GDP growth slows during the first three years of the forecast, reflecting the current economic recession, shows higher growth for the first ten years as the economy recovers, and then returns to its long-run growth path.  In the reference case, real GDP declines by 0.9 percent for the first two years, and then returns to 3.0 percent growth for the recovery period and 2.5 percent growth for the final fifteen years.  Both the high and low macroeconomic growth cases show similar patterns of early lower growth, recovery and settling back into their respective long-run growth trends. In the near term from 2008 through 2010, the growth in nonfarm employment is low at -2.2 percent compared with 2.4 percent in the second half of the 1990s, while the economy is expected to experience productivity growth of 2.0 percent. Over the projection period, nonfarm employment is expected to grow by 0.8 percent per year. Nonfarm employment, a measure of demand for nonfarm labor, is generally more volatile than the labor force, a measure of labor supply. The latter depends upon the projection of population and labor force participation rate. The Census Bureau’s middle series population projection is used as a basis for population growth for the AEO2010. Total population is expected to grow by 0.9 percent per year between 2008 and 2035, and the share of population over 65 is expected to increase over time. However, the share of the labor force in the population over 65 is also projected to increase in the projection period. 

To achieve the reference case’s long-run 2.4 percent economic growth, there is an anticipated steady growth in labor productivity.   The improvement in labor productivity reflects the positive effects of a growing capital stock as well as technological change over time.  Nonfarm labor productivity is expected to remain between 1.9 and 2.0 percent for the remainder of the projection period from 2008 through 2035.  Business fixed investment as a share of nominal GDP is expected to grow over the last 10 years of  the projection.  The resulting growth in the capital stock and the technology base of that capital stock helps to sustain productivity growth of 2.0 percent from the 2008 to 2035. 

To reflect the uncertainty in projection of economic growth, the AEO2010  uses high and low economic growth cases along with the reference case to project the possible impacts on energy markets. 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 3.0 percent per year between 2008 and 2035.  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 1.8 percent per year over the projection horizon.

Macroeconomic Table