Second Quarter 2014 Survey of Professional Forecasters See Stronger Quarterly Growth This Year Accompanied by Lower Unemployment

from the Federal Reserve Bank of Philadelphia

The outlook for growth over the next three quarters looks stronger now than it did three months ago, according to 42 forecasters surveyed by the Federal Reserve Bank of Philadelphia. Growth this quarter will be 3.3 percent at an annual rate, up from the previous estimate of 3.0 percent. Third-quarter growth will be 2.9 percent, an upward revision from the previous projection of 2.8 percent, while fourth-quarter growth will be 3.2 percent, up from 2.7 percent in the last survey. At the same time, surprisingly weak historical first-quarter growth is pulling down the survey’s current projection for growth in the annual-average level of real GDP in 2014, from 2.8 percent in the last survey to 2.4 percent in this survey.

The forecasters see an improved outlook for the unemployment rate over the next three years. The forecasters predict that the unemployment rate will be an annual average of 6.4 percent in 2014, before falling to 5.9 percent in 2015, 5.6 percent in 2016, and 5.5 percent in 2017. The projections for 2014, 2015, and 2016 are below those of the last survey.

On the jobs front, the forecasters have revised upward their estimates for job gains in 2014. The forecasters’ projections for the annual-average level of nonfarm payroll employment suggest job gains at a monthly rate of 196,500 in 2014, up from the previous estimate of 187,700, and 202,700 in 2015, as the table below shows. (These annual-average estimates are computed as the year-to-year change in the annual-average level of nonfarm payroll employment, converted to a monthly rate.)

A NOTE TO USERS OF THE DATA FOR DENSITY PROJECTIONS FOR UNEMPLOYMENT AND GDP INFLATION

This survey is the second one to incorporate new ranges for the density projections for unemployment and GDP inflation. We first incorporated the new ranges into the 2014 first-quarter survey. Because the new ranges are the same in this survey and the first-quarter survey, users may compare results across the 2014 first-quarter and second-quarter surveys.

At the same time, users should exercise caution in comparing the results of this survey and the first-quarter 2014 survey with the results of surveys that we conducted prior to the first-quarter 2014 survey.

The charts below provide some insight into the degree of uncertainty the forecasters have about their projections for the rate of growth in the annual-average level of real GDP. Each chart presents the forecasters’ previous and current estimates of the probability that growth will fall into each of 11 ranges. The forecasters have shifted the distributions of density to the left for 2014, indicating their expectations for lower growth in the annual-average level of real GDP, compared with their previous estimates. The distributions of density for 2015, 2016, and 2017 remain mostly unchanged compared with the previous estimates.

• Mean Probabilities for Real GDP Growth in 2014 (chart)
• Mean Probabilities for Real GDP Growth in 2015 (chart)
• Mean Probabilities for Real GDP Growth in 2016 (chart)
• Mean Probabilities for Real GDP Growth in 2017 (chart)

The forecasters’ density projections for unemployment, shown below, shed light on uncertainty about the labor market over the next four years. Each chart for unemployment presents the forecasters’ current estimates of the probability that unemployment will fall into each of 10 ranges. The charts show the forecasters are raising their density estimates over the next three years at the lower levels of unemployment outcomes, suggesting the forecasters are more confident about lower unemployment than they were in the last survey.

• Mean Probabilities for Unemployment Rate in 2014 (chart)
• Mean Probabilities for Unemployment Rate in 2015 (chart)
• Mean Probabilities for Unemployment Rate in 2016 (chart)
• Mean Probabilities for Unemployment Rate in 2017 (chart)

Forecasters See Higher Current-Quarter Headline Inflation but Leave Their Broad Contour Unchanged

The forecasters predict that current-quarter headline CPI inflation will average 1.9 percent, higher than the last survey’s estimate of 1.7 percent. The forecasters expect current-quarter headline PCE inflation of 1.7 percent, higher than the prediction of 1.5 percent from the survey of three months ago.

The forecasters see little change in headline and core measures of CPI and PCE inflation during the next three years. Measured on a fourth-quarter over fourth-quarter basis, headline CPI inflation is expected to average 1.9 percent in 2014, 2.1 percent in 2015, and 2.2 percent in 2016. Forecasters expect fourth-quarter over fourth-quarter headline PCE inflation to average 1.6 percent in 2014, 1.9 percent in 2015, and 1.9 percent in 2016.

Over the next 10 years, from 2014 to 2023, the forecasters expect headline CPI inflation to average 2.25 percent at an annual rate. The corresponding estimate for 10-year annual-average PCE inflation is 2.00 percent. The 10-year CPI estimate is down a bit from the previous estimate, but the 10-year PCE estimate is unchanged.

The charts below show the median projections (the red line) and the associated interquartile ranges (the gray area around the red line) for 10-year annual-average CPI and PCE inflation. The top panel shows little change in the long-term projection for CPI inflation. The bottom panel highlights the unchanged 10-year forecast for PCE inflation.

• Projections for the 10-Year Annual-Average Rate of CPI Inflation (chart)
• Projections for the 10-Year Annual-Average Rate of PCE Inflation (chart)

The figures below show the probabilities that the forecasters are assigning to the possibility that fourth-quarter over fourth-quarter core PCE inflation in 2014 and 2015 will fall into each of 10 ranges. The probabilities are about the same now, particularly for 2015 inflation outcomes, as they were in the last survey.

• Mean Probabilities for Core PCE Inflation in 2014 (chart)
• Mean Probabilities for Core PCE Inflation in 2015 (chart)

Low Risk of a Negative Quarter

For the current quarter, the forecasters predict an 8.3 percent chance of a contraction in real GDP. As the table below shows, the forecasters have kept their risk estimates for a downturn in the following quarters nearly unchanged, compared with their previous estimates.

The Federal Reserve Bank of Philadelphia thanks the following forecasters for their participation in recent surveys:

Lewis Alexander, Nomura Securities; Scott Anderson, Bank of the West (BNP Paribas Group); Robert J. Barbera, Johns Hopkins University Center for Financial Economics;Peter Bernstein, RCF Economic and Financial Consulting, Inc.; Christine Chmura, Ph.D.and Xiaobing Shuai, Ph.D., Chmura Economics & Analytics; Gary Ciminero, CFA, GLC Financial Economics; David Crowe, National Association of Home Builders; Nathaniel Curtis, Navigant; Rajeev Dhawan, Georgia State University; Gregory Daco, Oxford Economics USA, Inc.; Michael R. Englund, Action Economics, LLC; Matthew Hall and Daniil Manaenkov, RSQE, University of Michigan; James Glassman, JPMorgan Chase & Co.; Jan Hatzius, Goldman Sachs; Keith Hembre, Nuveen Asset Management; Peter Hooper, Deutsche Bank Securities, Inc.; IHS Global Insight; Fred Joutz, Benchmark Forecasts and Research Program on Forecasting, George Washington University; Sam Kahan, Kahan Consulting Ltd. (ACT Research LLC); N. Karp, BBVA Compass; Walter Kemmsies, Moffatt & Nichol; Jack Kleinhenz, Kleinhenz & Associates, Inc.; Thomas Lam, OSK-DMG/RHB; L. Douglas Lee, Economics from Washington; Allan R. Leslie, Economic Consultant; John Lonski, Moody’s Capital Markets Group; Macroeconomic Advisers, LLC; Dean Maki, Barclays Capital; Anthony Metz, Pareto Optimal Economics; Michael Moran, Daiwa Capital Markets America; Joel L. Naroff, Naroff Economic Advisors; Michael P. Niemira, International Council of Shopping Centers; Luca Noto, Anima Sgr; Brendon Ogmundson, BC Real Estate Association; Arun Raha, Eaton Corporation; Martin A. Regalia, U.S. Chamber of Commerce; Philip Rothman, East Carolina University; Chris Rupkey, Bank of Tokyo-Mitsubishi UFJ; John Silvia, Wells Fargo; Allen Sinai, Decision Economics, Inc.; Tara M. Sinclair, Research Program on Forecasting, George Washington University; Sean M. Snaith, Ph.D., University of Central Florida; Neal Soss, Credit Suisse; Stephen Stanley, Pierpont Securities; Charles Steindel, New Jersey Department of the Treasury; Susan M. Sterne, Economic Analysis Associates, Inc.; Thomas Kevin Swift, American Chemistry Council; Richard Yamarone, Bloomberg, LP; Mark Zandi, Moody’s Analytics.

This is a partial list of participants. We also thank those who wish to remain anonymous.