Today, the Federal Reserve Bank of New York is hosting the spring meeting of its Economic Advisory Panel (EAP). As has become the custom at this meeting, the New York Fed Research staff is presenting its forecast for U.S. growth, inflation, and the unemployment rate. Following the presentation, members of the EAP, which consists of leading economists in academia and the private sector, are asked to critique the staff forecast. Such feedback helps the staff evaluate the assumptions and reasoning underlying its forecast as well as the forecast’s key risks. The feedback is also an important part of the forecasting process because it informs the staff’s discussions with New York Fed President John Williams about economic conditions. In that same spirit, we are sharing a short summary of the staff forecast in this post; for more detail, see the New York Fed Staff Outlook Presentation from the EAP meeting on our website.
Staff Forecast Summary
Here we discuss the New York Fed staff forecast for real GDP growth, the unemployment rate, and inflation in 2019 and 2020.
In our forecast released last April, we projected a Q4/Q4 growth rate of about 2¾ percent for 2018, a bit above the rate for 2017. The U.S. economy had entered 2018 with significant momentum and the staff anticipated that significant fiscal stimulus along with generally solid global economic conditions would support household consumption and business investment through the year. In addition, low inventories of housing and rising home prices were projected to lead to a moderate rise in residential investment.
As it turned out, real GDP growth in 2018 was 3.0 percent. Consumer spending and business investment in intellectual property products were stronger than expected. The firmer growth of real consumer spending resulted from solid real income growth and strong consumer confidence. The strength of investment in intellectual property products was primarily in software and in research and development. Also, inventory investment contributed more to growth in the year than we had projected. Partly offsetting these positive factors, residential investment declined over the year as the housing market softened and investment in business equipment grew more slowly than anticipated.
Growth in 2018 was well above our estimate of the economy’s potential growth rate (1¾ percent); however, the unemployment rate declined only modestly to 3.8 percent in 2018:Q4, slightly above our April 2018 projection. The smaller decline in unemployment reflected a combination of slightly higher labor force participation in a tight labor market and modestly higher productivity growth.
Inflation, as measured by four-quarter change in the core PCE price index, was 1.9 percent, above the reading from the previous year but below our April 2018 forecast. This was a continuation of the pattern from recent years of muted inflation pressures despite indications of a relatively tight labor market and little apparent resource slack.
For 2019, last year’s forecast envisioned that real GDP growth would slow only modestly to about 2½ percent as fiscal stimulus would continue to support growth. The unemployment rate was expected to decline further, to around 3½ percent, by the end of 2019. Inflation was expected to be slightly above 2 percent: the overshoot of the Federal Open Market Committee’s (FOMC) objective was anticipated to be small owing to well-anchored inflation expectations.
We now anticipate that real GDP growth for 2019 will be about 2 percent—half a percentage point lower than our year-earlier forecast. We have seen a noticeable loss of momentum in the U.S. economy toward the end of last year and the start of this year, with growth of both consumer spending and business fixed investment slowing relative to their 2018 performance. In addition, many of the largest foreign economies have also experienced slower growth. Financial conditions have eased recently following a marked tightening in the fourth quarter, but on balance remain tighter than they were over most of 2018. Moreover, there remains substantial uncertainty regarding economic and trade policy, while geopolitical risks are heightened. Partially offsetting these factors is the expectation of faster growth for government expenditures.
Even so, we expect solid fundamentals to help maintain real consumer spending growth fairly well through rest of the year. With lower mortgage rates providing support, we anticipate that residential investment will grow in 2019 after the decline in 2018. In contrast, with the backdrop of softer global final demand and less support from tax policy, growth of business investment is projected to be lower than in 2018.
With growth expected to be fairly close to its potential rate in 2019, we expect the unemployment rate to remain near 3¾ percent through the year, which is below our estimate of the longer-run unemployment rate associated with stable inflation (4.1 percent). Underlying inflation, as measured by the core PCE price index, is projected to be near the FOMC’s longer-run objective of 2 percent through the year amid anchored inflation expectations.
For 2020, we expect that real GDP growth will moderate slightly further, in part reflecting the waning of fiscal stimulus implemented in 2017 and 2018. With real GDP growth expected to be at or slightly below its potential rate, the unemployment rate is expected to be near 3¾ percent through much of the year before beginning to rise slowly in the latter part. Inflation is expected to be slightly above 2 percent, as pressures from tight resource utilization are mitigated by a flat Phillips curve and well-anchored inflation expectations.
Comparison to the Blue Chip Forecast
Here, we compare the New York Fed staff forecast to the consensus forecast from the March Blue Chip Economic Indicators, published on March 10. The forecasts for real GDP growth are broadly similar for both 2019 and 2020. For the unemployment rate, the path of the New York Fed staff forecast lies slightly above that of the Blue Chip consensus forecast through the end of 2020.
The Blue Chip asks for projections of inflation as measured by the Consumer Price Index, rather than the overall or core PCE price index. The Blue Chip consensus forecast for CPI inflation is 2.0 percent in 2019 and 2.2 percent in 2020. The New York Fed staff projections for total PCE inflation are 2.0 percent in 2019 and 2.2 percent in 2020. Given the typical divergence between CPI and PCE inflation, the staff forecast suggests slightly higher inflation than the Blue Chip consensus for both years.
Risks to Staff Forecast
An important part of the staff analysis of the economic outlook is the assessment of the risks to the forecast. The staff sees the risks to our projection for real growth as tilted slightly to the downside. Key downside risks include larger adverse impacts from a global slowdown, from economic policy uncertainty—most notably emanating from trade tensions—or from the tightening of financial conditions in the fourth quarter. An upside risk is that fiscal stimulus provides more positive effects than we anticipate.
For inflation, we see the risks as roughly balanced. We see the upside risks stemming from resource constraints or higher tariffs as relatively muted. Those risks are offset by the possibility that weaker global demand dampens inflation and inflation expectations more than anticipated.
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.
David Lucca is an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.
Jonathan McCarthy is a vice president in the Bank’s Research and Statistics Group.
Richard Peach is a senior vice president in the Research and Statistics Group.
How to cite this blog post:
Jonathan McCarthy, Richard Peach, and Robert Rich, “Just Released: The New York Fed Staff Forecast—April 2019,” Federal Reserve Bank of New York Liberty Street Economics (blog), April 5, 2019, http://libertystreeteconomics.newyorkfed.org/2019/04/just-released-the-new-york-fed-staff-forecast-april-2019.html.