Survey of Professional Forecasters

SECOND QUARTER 2004

Forecasters Hold the Line on Their Projections for Output Growth
Not much has changed over the past three months to entice our panel of forecasters to alter their projections for economic growth over the next two years. According to 32 forecasters surveyed by the Federal Reserve Bank of Philadelphia, real GDP will grow at an annual rate of 4.5 percent in the second quarter, up a bit from the previous forecast of 4.3 percent. However, on a year-over-year basis, the forecasters see output growing at a rate of 4.6 percent this year, the same rate they predicted three months ago. Looking a bit further into the future, the forecasters expect the economy to grow at a rate of 3.9 percent in 2005, up just a bit from their previous projection of 3.8 percent.

Not surprisingly, the forecasters' projection for unemployment is little changed. In 2004, they see unemployment averaging 5.5 percent, down from 5.6 percent in the last survey, but their forecast of 5.3 percent in 2005 is the same rate they expected three months ago.

At the same time that the forecasters are holding the line on their projections for output and unemployment, they are raising their projections for near-term inflation. On a fourth-quarter over fourth-quarter basis, CPI inflation is expected to average 2.7 percent in 2004 and 2.2 percent in 2005, up from 1.6 percent and 1.9 percent, respectively, in the survey of three months ago. The forecasters are also revising upward their projections for an alternative, broader measure of inflation given by the price index for GDP. On a year-over-year basis, that index is expected to rise 1.9 percent in 2004, up from 1.4 percent previously, and 1.9 percent in 2005, up from 1.7 percent.

Slightly Larger Job Gains Seen in 2004 -2005
The forecasters are raising their projections for job gains in the current quarter and for the year, but they anticipate roughly the same rate of job gains in 2005 as they expected in the last survey. Nonfarm payroll employment will rise at an annual rate of 2.2 percent in the second quarter, up from the previous estimate of 1.3 percent. On a year-over-year basis, the forecasters see the number of jobs rising 1.0 percent in 2004, an increase of 0.2 percentage point over their previous forecast of 0.8 percent. The forecasters expect payroll employment to grow at a rate of 1.7 percent in 2005, the same rate they expected in the previous survey. If we measure the flow of new jobs on an annual-average minus annual-average basis, the forecasters expect job gains at a rate of 111,000 per month in 2004 and 186,000 per month in 2005. Previously, the forecasters thought job gains would average 91,000 per month in 2004 and 188,000 per month in 2005.

Little Risk of a Negative Quarter
The forecasters are cutting the chance of a decline in real GDP in the next two quarters. In the current quarter, the forecasters see only a 1 percent chance that real GDP will decline, down from 5 percent in the previous survey. In the third quarter, the chance stands at 4 percent, down a bit from the previous estimate of 6 percent.

No Change in Expectations for Long-Term Inflation
Despite their upward revision to expectations for CPI inflation over the next two years noted above, the forecasters do not expect permanently higher inflation. Over the next 10 years, the forecasters continue to expect inflation to average 2.50 percent. The Philadelphia Fed's measure of long-term expectations for inflation has held steady at 2.50 percent since the late 1990s.

Short-Term Interest Rates Are Seen Rising at a Faster Pace
The forecasters see short-term interest rates, as measured by the rate on three-month Treasury bills, rising a bit faster over the next few quarters than they thought three months ago. In this survey, the forecasters see that rate rising from 1.0 percent in the second quarter to 2.0 percent in the first quarter of 2005. Previously, the forecasters expected that rate to rise from 1.0 percent to 1.8 percent over the same period. For the year, the forecasters expect the three-month rate to average 1.2 percent, unchanged from the last survey. However, in 2005, the forecasters now expect three-month Treasury bills to average 2.5 percent, up from their previous forecast of 2.2 percent.

On the long end of the maturity spectrum, the forecasters expect the rate on 10-year Treasury bonds to average 4.6 percent in 2004, up a bit from their previous projection of 4.5 percent. Long-term rates will rise to 5.2 percent in 2005, but that forecast marks a revision downward from the previous forecast of 5.3 percent.

The Philadelphia Fed's Survey of Professional Forecasters was formerly conducted by the American Statistical Association (ASA) and the National Bureau of Economic Research (NBER) and was known as the ASA/NBER survey. The survey, which began in 1968, is conducted each quarter. The Federal Reserve Bank of Philadelphia, in cooperation with the NBER, assumed responsibility for the survey in June 1990.