Jonathan McCarthy and Richard Peach
As we did last year around this time, we’re presenting the New York Fed staff outlook for the U.S. economy to the Bank’s Economic Advisory Panel at today’s meeting. It provides an opportunity to get valuable feedback from leading economists in academia and the private sector on the staff forecast; such feedback helps us evaluate the assumptions and reasoning underlying our forecast and the risks to it. It’s important to open the staff forecast to periodic evaluation to inform the staff’s discussions with New York Fed President Bill Dudley about economic conditions. In the same spirit of inviting feedback, we’re sharing a short summary of our forecast; for more, see the material from the Panel’s meeting.
Here, we discuss the New York Fed staff forecast for real GDP growth, the unemployment rate, and inflation in 2013 and 2014.
The forecast anticipates moderate economic expansion over the next two years. Real GDP growth in 2013 is expected to be around 2½ percent, slightly below the rate in 2013:Q1 as well as below our year-ago projection of about 3 percent. A major factor behind the projected sluggishness over the rest of this year is fiscal policy. The combination of sequestration and the tax increases associated with the agreement to avert the “fiscal cliff” is anticipated to exert a significant drag on GDP growth of more than 1 percentage point. In 2014, the fiscal drag is expected to be smaller than in 2013. With a smaller fiscal drag, an expected further lessening of other headwinds—for example, the European sovereign debt crisis and the deleveraging of household balance sheets—and further improvement in labor market and financial conditions, we project real growth in 2014 of around 3¼ percent.
With the overall economy expected to grow rather sluggishly for the remainder of 2013, the staff projects the unemployment rate to be near the April level over the rest of the year, averaging about 7¼ percent in the fourth quarter. As stronger growth is anticipated for 2014, we project a more substantial decline in unemployment, to about 6½ percent in the fourth quarter, which would be roughly similar to its behavior at this stage of “long” economic expansions (as discussed in this post).
Overall inflation, after being fairly subdued in 2012 (1.6 percent for the PCE deflator and 1.9 percent for the CPI on a Q4/Q4 basis), is expected to slow a bit further in 2013, in part reflecting declines in oil and gasoline prices and the expectations of those prices embedded in futures market prices. Core inflation measures are also anticipated to moderate further in 2013. In 2014, the staff expects overall and core inflation measures to be higher, as they move toward long-term inflation expectations and the FOMC’s longer-run goal for inflation. The continued anchoring of longer-term inflation expectations and subdued compensation growth are consistent with inflation remaining near that objective.
Comparison with the Blue Chip and SPF Forecasts
We now compare the New York Fed staff forecast with the consensus forecasts from the May Blue Chip Economic Indicators and the second-quarter Survey of Professional Forecasters (SPF), both of which were published on May 10.
The staff forecast for real GDP growth in 2013 is roughly similar to the Blue Chip consensus forecast and the SPF median forecast, as most forecasts expect a significant amount of fiscal restraint. The staff forecast for 2014 is somewhat above the Blue Chip and SPF, which probably reflects our expectation of more receding of the headwinds and greater improvement in fundamentals than in the consensus forecast of the surveys. This pattern influences the patterns for the unemployment rate projections: the staff forecast is near the Blue Chip and SPF forecasts in 2013:Q4, but below both for 2014:Q4 as well as below the average of the bottom ten forecasts in the Blue Chip survey. The difference between the staff forecast and the consensus forecast from these surveys reflects our projected higher real GDP growth path and assessment that considerable slack remains in resource utilization. (The concluding post of our labor market series from 2012 provides estimates of how low the unemployment rate could go.)
The staff inflation forecast is somewhat below the Blue Chip consensus forecast (CPI inflation only) and the SPF median forecast (both CPI and PCE inflation) for 2013. The staff inflation projection for 2014 is modestly above the Blue Chip consensus and near the SPF median forecasts. The more rapid bounce-back in inflation in the staff forecast reflects the fact that we see a stronger influence on inflation from the pull of inflation expectations relative to the restraint from resource slack than do many private forecasters.
Risks to the Staff Forecast
Because modal forecasts most often don’t coincide with actual outcomes in retrospect, an important part of the staff analysis of the economic outlook is the assessment of risks. In a continued uncertain environment, the staff sees the risks to real economic activity as roughly balanced (after being skewed to the downside for much of the past year). A reduction in the risks associated with an intensification of the European sovereign debt crisis and the realization of greater fiscal restraint have contributed to this shift in the risk assessment. For inflation, the staff assesses that the risks are roughly balanced, similar to its assessment from a year ago. Compared with the means of the SPF respondents’ probability assessments for real GDP growth, unemployment, and inflation, the staff’s risk assessment displays considerably more uncertainty around its central forecast. Of course, New York Fed staff monitors developments to determine if such risks are beginning to materialize and adjusts the forecast accordingly.
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
Jonathan McCarthy is a vice president in the Research and Statistics Group of the Federal Reserve Bank of New York.
Richard Peach is a senior vice president in the Group.