Summary of Economic Projections
In conjunction with the October 2007 FOMC meeting, the members of the Board of Governors and the presi-dents of the Federal Reserve Banks, all of whom par-ticipate in the deliberations of the FOMC, provided projections for economic growth, unemployment, and inflation in 2007, 2008, 2009, and 2010. Projections were based on information available through the con-clusion of the October meeting, on each participant’s assumptions regarding a range of factors likely to affect economic outcomes, and his or her assessment of ap-propriate monetary policy. “Appropriate monetary policy” is defined as the future policy most likely to foster outcomes for economic activity and inflation that best satisfy the participant’s interpretation of the Federal Reserve’s dual objectives of maximum em-ployment and price stability.
The projections, which are summarized in table 1 and chart 1, suggest that FOMC participants expected that, in the near term, output will grow at a pace somewhat below its trend rate and the unemployment rate will edge higher, owing primarily to weakness in housing markets and to the tightening in the availability of credit resulting from recent strains in financial markets. Further ahead, output was projected to expand at a pace close to its long-run trend. Total inflation was expected to be lower in 2008 than in 2007, and then to edge down further in subsequent years.
The Outlook
Data available at the time of the October FOMC meet-ing indicated that economic growth had been solid dur-ing the second and third quarters, and evidence that the contraction in the housing sector had begun to spill over substantially to other sectors of the economy re-mained scant. Consequently, despite the recent finan-cial market turmoil, the central tendency of partici-pants’ projections for real GDP growth in 2007, at 2.4 to 2.5 percent, was little changed from the central ten-dency of the projections provided in conjunction with the June FOMC meeting and included in the Board’s Monetary Policy Report to the Congress in July. However, the central tendency of participants’ projections for real GDP growth in 2008 was revised down to 1.8 to 2.5 percent, notably below the 2½ to 2¾ percent central tendency in June. These revisions to the 2008 outlook since June stemmed from a number of factors, includ-ing the tightened terms and reduced availability of sub-prime and jumbo mortgages, weaker-than-expected housing data, and rising oil prices. Partly in response to declining housing wealth, the personal saving rate was expected to rise over the next few years, contributing to restraint on the growth of personal consumption ex-penditures. However, net exports were expected to provide some support to growth. The subpar eco-nomic growth projected in the near term was not an-ticipated to persist. Growth was expected to pick up as the adjustment in housing markets ran its course, fi-nancial markets gradually resumed more-normal func-tioning, and as the monetary policy easing at the Sep-tember and October FOMC meetings provided sup-port to aggregate demand. Economic activity was pro-jected to expand at a pace broadly in line with partici-pants’ estimates of the rate of expansion of the econ-omy’s productive potential in 2009 and to continue at much the same pace in 2010. Participants read last summer’s benchmark revisions to the national income and product accounts as suggesting a somewhat slower rate of trend growth than previously thought.
Most participants expected that, with output growth running somewhat below trend over the next year or so, the unemployment rate would increase modestly. The central tendency of participants’ projections for the average rate of unemployment in the fourth quarter of 2008 was 4.8 to 4.9 percent, slightly above the 4¾ percent unemployment rate forecasted in June; these projections suggested the emergence of a little slack in labor markets. The central tendency of partici-pants’ projections was for the unemployment rate to stabilize in 2009 and to fall back a bit in 2010 as output and employment growth pick up.
Overall inflation was expected to edge down over the next few years, fostered by an assumed flattening of energy prices about in line with futures markets quotes, a modest easing of pressures on resource utilization, and fairly well anchored inflation expectations. Partici-pants’ projections for core inflation this year and next were marked down from those provided at the time of the June FOMC meeting, partly in light of recent gen-erally favorable core inflation data that pointed to some reduction in underlying inflation pressures. The central tendency of projections for core PCE inflation in 2007 was 1.8 to 1.9 percent, down from 2 to 2¼ percent in June. The central tendency of core inflation projec-tions for 2008 was 1.7 to 1.9 percent. Participants’ pro-jections for PCE inflation in 2009 and 2010 were im-portantly influenced by their judgments about the measured rates of inflation consistent with the Federa Reserve’s dual mandate to promote maximum em-ployment and price stability and about the time frame over which policy should aim to attain those rates given
current economic conditions. The central tendency of participants’ projections for both core and total infla-tion in 2010 ranged from 1.6 to 1.9 percent.
Table 1: Economic Projections of Federal Reserve Governors and Reserve Bank Presidents1
1.
Projections of real GDP growth, PCE inflation, and core PCE inflation are fourth-quarter-to-fourth-quarter growth rates, that is, percentage changes from the fourth quarter of the prior year to the fourth quarter of the indicated year. PCE inflation and core PCE inflation are the percentage rates of change in the price index for personal consumption expenditures and the price index for personal consumption expenditures excluding food and energy, respectively. Projections for the un-employment rate are for the average civilian unemployment rate in the fourth quarter of each year. Each participant's projections are based on his or her assessment of appropriate monetary policy. The range for each variable in a given year includes all participants' projections, from lowest to high-est, for that variable in the given year; the central tendencies exclude the three highest and three lowest projections for each variable in each year.
Chart 1: Central Tendencies and Ranges of Economic Projections*
Risks to the Outlook
Most participants viewed the risks to their GDP projec-tions as weighted to the downside and the associated risks to their projections of unemployment as tilted to the upside. Financial market conditions had deterio-rated sharply in August, and although there had been some signs of improvement since then, markets re-mained strained. The possibilities that markets could relapse or that current tighter credit conditions could exert unexpectedly large restraint on household and business spending were viewed as downside risks to economic activity. Participants were concerned about the possibility for adverse feedbacks in which economic weakness could lead to further tightening in credit con-ditions, which could in turn slow the economy further. The potential for a more severe contraction in the housing sector and a substantial decline in house prices was also perceived as a risk to the central outlook for economic growth. But participants also noted that in recent decades, the U.S. economy had proved quite resilient to episodes of financial distress, suggesting that the adverse effects of financial developments on economic activity outside of the housing sector could prove to be more modest than anticipated.
Participants were more persuaded than they had been in June that the decline in core inflation readings this year represented a sustained albeit modest step-down rather than the effect of transitory influences. None-theless, participants saw some upside risks to their in-flation projections. Recent increases in energy and commodity prices and the pass-through of dollar de-preciation into import prices would raise inflation over the medium term. That increase could lead to an up-ward drift in inflation expectations that would add to price pressures and could be costly to reverse.
The possibility that financial market turbulence could have larger-than-anticipated adverse effects on house-hold and business spending heightened participants’ uncertainty about the outlook for economic activity. Most participants judged that the uncertainty attending their October projections for real GDP growth was above typical levels seen in the past. (Table 2 provides an estimate of average ranges of forecast uncertainty for GDP growth, unemployment, and inflation over the past twenty years.1) In contrast, the uncertainty
1 The box “Forecast Uncertainty” at the end of this summary dis-cusses the sources and interpretation of uncertainty in economic forecasts and explains the approach used to assess the uncertainty and risks attending participants’ projections. attached to participants’ inflation projections was gen-erally viewed as being broadly in line with past experi-ence, although several participants judged that the de-gree of uncertainty about total inflation was higher than usual, reflecting the possibility that the recent volatility in food and energy prices might persist.
Table 2: Average Historical Projection Error Ranges1
2007
2008
2009
2010
Real GDP2
±0.6
±1.3
±1.4
±1.4
Unemployment rate3
±0.2
±0.6
±0.9
±1.1
Total consumer prices2
±0.3
±1.0
±1.0
±1.0
1.
“Average historical projection error ranges” for the years 2007 through 2010 are measured as plus or minus the root mean squared error of projections that were released in the autumn from 1986 through 2006 for the current and following three years by various private and government forecasters. As described in the forecast uncertainty box, under certain assumptions, there is about a 70 percent prob-ability that actual outcomes for real activity, unemployment, and inflation will fall in ranges implied by the average size of projection errors made in the past. For further information, see David Reifschneider and Peter Tulip, “Gauging the Uncertainty of the Economic Outlook from Historical Forecast Errors,” Federal Reserve Board Financial and Eco-nomics Discussion Series #2007-60 (November 2007).
2.
Overall consumer price index, as this is the price meas-ure that has been most widely used in government and pri-vate economic forecasts. Percent change, fourth quarter of year relative to fourth quarter of preceding year.
3.
Percent, fourth-quarter average.
Diversity of Participants’ Views
Charts 2(a) and 2(b) provide more detail on the diver-sity of participants’ views. The dispersion of partici-pants’ projections for real GDP growth in 2008 was markedly wider than in June. The dispersion of par-ticipants’ projections for growth next year seemed largely to reflect differing assessments of the likely depth and duration of the correction in the housing market, the effect of financial market disruptions on real activity outside of the housing sector, and the speed with which financial markets will return to more normal functioning. The dispersion of participants’ projections for the rate of unemployment over the next year or so had changed little. Participants’ longer-term projections for real GDP growth and for the rate of unemployment were more heavily influenced by their views about, respectively, the economy’s trend growth rate and the unemployment rate that would be consis-tent over time with maximum employment. The dis-persion of the projections for PCE inflation in the near term partly reflected different weights attached to the various factors expected to foster a moderation of in-flation. Some participants judged that the anticipated modest easing in resource pressures was unlikely to have a marked effect on inflation. Similarly, views dif-fered about the influence that inflation expectations would exert on inflation over the short and medium run. Participants’ projections further out were also influenced by their views about the rate of inflation consistent with the Federal Reserve’s dual mandate.
In conjunction with the October 2007 FOMC meeting, the members of the Board of Governors and the presi-dents of the Federal Reserve Banks, all of whom par-ticipate in the deliberations of the FOMC, provided projections for economic growth, unemployment, and inflation in 2007, 2008, 2009, and 2010. Projections were based on information available through the con-clusion of the October meeting, on each participant’s assumptions regarding a range of factors likely to affect economic outcomes, and his or her assessment of ap-propriate monetary policy. “Appropriate monetary policy” is defined as the future policy most likely to foster outcomes for economic activity and inflation that best satisfy the participant’s interpretation of the Federal Reserve’s dual objectives of maximum em-ployment and price stability.
The projections, which are summarized in table 1 and chart 1, suggest that FOMC participants expected that, in the near term, output will grow at a pace somewhat below its trend rate and the unemployment rate will edge higher, owing primarily to weakness in housing markets and to the tightening in the availability of credit resulting from recent strains in financial markets. Further ahead, output was projected to expand at a pace close to its long-run trend. Total inflation was expected to be lower in 2008 than in 2007, and then to edge down further in subsequent years.
The Outlook
Data available at the time of the October FOMC meet-ing indicated that economic growth had been solid dur-ing the second and third quarters, and evidence that the contraction in the housing sector had begun to spill over substantially to other sectors of the economy re-mained scant. Consequently, despite the recent finan-cial market turmoil, the central tendency of partici-pants’ projections for real GDP growth in 2007, at 2.4 to 2.5 percent, was little changed from the central ten-dency of the projections provided in conjunction with the June FOMC meeting and included in the Board’s Monetary Policy Report to the Congress in July. However, the central tendency of participants’ projections for real GDP growth in 2008 was revised down to 1.8 to 2.5 percent, notably below the 2½ to 2¾ percent central tendency in June. These revisions to the 2008 outlook since June stemmed from a number of factors, includ-ing the tightened terms and reduced availability of sub-prime and jumbo mortgages, weaker-than-expected housing data, and rising oil prices. Partly in response to declining housing wealth, the personal saving rate was expected to rise over the next few years, contributing to restraint on the growth of personal consumption ex-penditures. However, net exports were expected to provide some support to growth. The subpar eco-nomic growth projected in the near term was not an-ticipated to persist. Growth was expected to pick up as the adjustment in housing markets ran its course, fi-nancial markets gradually resumed more-normal func-tioning, and as the monetary policy easing at the Sep-tember and October FOMC meetings provided sup-port to aggregate demand. Economic activity was pro-jected to expand at a pace broadly in line with partici-pants’ estimates of the rate of expansion of the econ-omy’s productive potential in 2009 and to continue at much the same pace in 2010. Participants read last summer’s benchmark revisions to the national income and product accounts as suggesting a somewhat slower rate of trend growth than previously thought.
Most participants expected that, with output growth running somewhat below trend over the next year or so, the unemployment rate would increase modestly. The central tendency of participants’ projections for the average rate of unemployment in the fourth quarter of 2008 was 4.8 to 4.9 percent, slightly above the 4¾ percent unemployment rate forecasted in June; these projections suggested the emergence of a little slack in labor markets. The central tendency of partici-pants’ projections was for the unemployment rate to stabilize in 2009 and to fall back a bit in 2010 as output and employment growth pick up.
Overall inflation was expected to edge down over the next few years, fostered by an assumed flattening of energy prices about in line with futures markets quotes, a modest easing of pressures on resource utilization, and fairly well anchored inflation expectations. Partici-pants’ projections for core inflation this year and next were marked down from those provided at the time of the June FOMC meeting, partly in light of recent gen-erally favorable core inflation data that pointed to some reduction in underlying inflation pressures. The central tendency of projections for core PCE inflation in 2007 was 1.8 to 1.9 percent, down from 2 to 2¼ percent in June. The central tendency of core inflation projec-tions for 2008 was 1.7 to 1.9 percent. Participants’ pro-jections for PCE inflation in 2009 and 2010 were im-portantly influenced by their judgments about the measured rates of inflation consistent with the Federa Reserve’s dual mandate to promote maximum em-ployment and price stability and about the time frame over which policy should aim to attain those rates given
current economic conditions. The central tendency of participants’ projections for both core and total infla-tion in 2010 ranged from 1.6 to 1.9 percent.
Table 1: Economic Projections of Federal Reserve Governors and Reserve Bank Presidents1
1.
Projections of real GDP growth, PCE inflation, and core PCE inflation are fourth-quarter-to-fourth-quarter growth rates, that is, percentage changes from the fourth quarter of the prior year to the fourth quarter of the indicated year. PCE inflation and core PCE inflation are the percentage rates of change in the price index for personal consumption expenditures and the price index for personal consumption expenditures excluding food and energy, respectively. Projections for the un-employment rate are for the average civilian unemployment rate in the fourth quarter of each year. Each participant's projections are based on his or her assessment of appropriate monetary policy. The range for each variable in a given year includes all participants' projections, from lowest to high-est, for that variable in the given year; the central tendencies exclude the three highest and three lowest projections for each variable in each year.
Chart 1: Central Tendencies and Ranges of Economic Projections*
Risks to the Outlook
Most participants viewed the risks to their GDP projec-tions as weighted to the downside and the associated risks to their projections of unemployment as tilted to the upside. Financial market conditions had deterio-rated sharply in August, and although there had been some signs of improvement since then, markets re-mained strained. The possibilities that markets could relapse or that current tighter credit conditions could exert unexpectedly large restraint on household and business spending were viewed as downside risks to economic activity. Participants were concerned about the possibility for adverse feedbacks in which economic weakness could lead to further tightening in credit con-ditions, which could in turn slow the economy further. The potential for a more severe contraction in the housing sector and a substantial decline in house prices was also perceived as a risk to the central outlook for economic growth. But participants also noted that in recent decades, the U.S. economy had proved quite resilient to episodes of financial distress, suggesting that the adverse effects of financial developments on economic activity outside of the housing sector could prove to be more modest than anticipated.
Participants were more persuaded than they had been in June that the decline in core inflation readings this year represented a sustained albeit modest step-down rather than the effect of transitory influences. None-theless, participants saw some upside risks to their in-flation projections. Recent increases in energy and commodity prices and the pass-through of dollar de-preciation into import prices would raise inflation over the medium term. That increase could lead to an up-ward drift in inflation expectations that would add to price pressures and could be costly to reverse.
The possibility that financial market turbulence could have larger-than-anticipated adverse effects on house-hold and business spending heightened participants’ uncertainty about the outlook for economic activity. Most participants judged that the uncertainty attending their October projections for real GDP growth was above typical levels seen in the past. (Table 2 provides an estimate of average ranges of forecast uncertainty for GDP growth, unemployment, and inflation over the past twenty years.1) In contrast, the uncertainty
1 The box “Forecast Uncertainty” at the end of this summary dis-cusses the sources and interpretation of uncertainty in economic forecasts and explains the approach used to assess the uncertainty and risks attending participants’ projections. attached to participants’ inflation projections was gen-erally viewed as being broadly in line with past experi-ence, although several participants judged that the de-gree of uncertainty about total inflation was higher than usual, reflecting the possibility that the recent volatility in food and energy prices might persist.
Table 2: Average Historical Projection Error Ranges1
2007
2008
2009
2010
Real GDP2
±0.6
±1.3
±1.4
±1.4
Unemployment rate3
±0.2
±0.6
±0.9
±1.1
Total consumer prices2
±0.3
±1.0
±1.0
±1.0
1.
“Average historical projection error ranges” for the years 2007 through 2010 are measured as plus or minus the root mean squared error of projections that were released in the autumn from 1986 through 2006 for the current and following three years by various private and government forecasters. As described in the forecast uncertainty box, under certain assumptions, there is about a 70 percent prob-ability that actual outcomes for real activity, unemployment, and inflation will fall in ranges implied by the average size of projection errors made in the past. For further information, see David Reifschneider and Peter Tulip, “Gauging the Uncertainty of the Economic Outlook from Historical Forecast Errors,” Federal Reserve Board Financial and Eco-nomics Discussion Series #2007-60 (November 2007).
2.
Overall consumer price index, as this is the price meas-ure that has been most widely used in government and pri-vate economic forecasts. Percent change, fourth quarter of year relative to fourth quarter of preceding year.
3.
Percent, fourth-quarter average.
Diversity of Participants’ Views
Charts 2(a) and 2(b) provide more detail on the diver-sity of participants’ views. The dispersion of partici-pants’ projections for real GDP growth in 2008 was markedly wider than in June. The dispersion of par-ticipants’ projections for growth next year seemed largely to reflect differing assessments of the likely depth and duration of the correction in the housing market, the effect of financial market disruptions on real activity outside of the housing sector, and the speed with which financial markets will return to more normal functioning. The dispersion of participants’ projections for the rate of unemployment over the next year or so had changed little. Participants’ longer-term projections for real GDP growth and for the rate of unemployment were more heavily influenced by their views about, respectively, the economy’s trend growth rate and the unemployment rate that would be consis-tent over time with maximum employment. The dis-persion of the projections for PCE inflation in the near term partly reflected different weights attached to the various factors expected to foster a moderation of in-flation. Some participants judged that the anticipated modest easing in resource pressures was unlikely to have a marked effect on inflation. Similarly, views dif-fered about the influence that inflation expectations would exert on inflation over the short and medium run. Participants’ projections further out were also influenced by their views about the rate of inflation consistent with the Federal Reserve’s dual mandate.
