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Second Quarter 2006

Stronger Growth in 2006 Is Seen Coming at the Expense of Weaker
Growth in 2007   
Stronger growth in real GDP this year will come at the expense of weaker growth next year, according to 53 forecasters surveyed by the Federal Reserve Bank of Philadelphia. The forecasters now see the U.S. economy growing 3.4 percent in 2006 (year-over-year basis), an upward revision of 0.2 percentage point over their previous estimate of 3.2 percent just three months ago. The upward revision to this year’s growth is offset by a downward revision in 2007, when the forecasters expect growth to average 3.0 percent, a decrease from their previous estimate of 3.2 percent.  Over the next two years as a whole, the forecasters see growth at an annual rate of 3.2 percent, the same rate they projected three months ago. The forecasters’ quarterly projections suggest steady growth through the first half of 2007: Growth in the current quarter of 3.4 percent at an annual rate (unrevised from the previous estimate) will be followed by growth near 3.0 percent in each of the next four quarters. 

A slightly lower path for the unemployment rate accompanies the outlook for growth.  The forecasters now expect unemployment to average 4.7 percent in 2006, down marginally from their previous estimate of 4.8 percent.  A similar downward revision characterizes the unemployment outlook in 2007, when the forecasters see unemployment averaging 4.8 percent, down from their earlier estimate of 4.9 percent. On the jobs front, the forecasters see nonfarm payroll employment increasing 1.5 percent in 2006 (year-over-year basis), unchanged from their estimate of three months ago, and 1.2 percent in 2007, down from 1.3 percent earlier. These projections translate into monthly job gains on a year-over-year basis of nearly 170,000 in 2006 and 138,000 in 2007. On a quarterly basis, the forecasters see monthly job gains starting off strongly at a pace of 170,000 this quarter, then trailing off gradually to a rate of 125,000 per month in the second quarter of 2007. 

Little Evidence of Rising Expectations for Inflation
The forecasters see little reason to increase their expectations for inflation, except at the shortest horizons.  Measured by the CPI, inflation will average 3.4 percent this quarter, an increase of nearly a full percentage point over the previous survey’s projection of 2.5 percent. Inflation will average 2.62 percent this year (fourth-quarter over fourth-quarter basis), up just 0.22 percentage point from the previous projection of 2.40 percent. Even smaller upward revisions characterize the outlook for 2007 and 2008:  The forecasters now think inflation will rise 2.35 percent next year and in 2008, up just 0.05 percentage point from the forecasts of 2.30 percent in each year made three months ago.  At the longest of horizons the projections are holding rock steady. On an annual average basis over the next five years, the forecasters peg the CPI inflation rate at 2.50 percent, the same rate they expected in the survey of three months ago.  Over the next 10 years, they see inflation at an annual average rate of 2.50 percent, also unchanged from the last survey.

Upward Revisions to the Path of Interest Rates Accompany the Outlook 
The forecasters see interest rates—both short and long term—at levels higher than they projected three months ago.  At the short end, the rate on three-month Treasury bills is projected to average 4.8 percent this year and also in 2007.  Previously, the forecasters thought the short rate would average just 4.5 percent in 2006 and 4.6 percent in 2007. The forecasters’ quarterly projections for this short-term rate, shown in the table below, call for it to rise from 4.8 percent this quarter to 5.0 percent next quarter, hold steady over the end of the year and early next year, before falling to 4.8 percent in next year’s second quarter. The forecasters are boosting their estimates for 10-year Treasury rates, to an annual average of 5.1 percent this year and 5.2 percent next year, marking upward revisions of 0.3 and 0.2 percentage point, respectively, from their previous estimates.

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

Joseph T. Abate, Lehman Brothers; Scott Anderson, Wells Fargo and Company; Robert J. Barbera, ITG; David W. Berson, Fannie Mae; Joseph Carson, Alliance Capital Management; Gary Ciminero, CFA, Rhode Island House Policy Office; Richard DeKaser, National City Corporation; Rajeev Dhawan, Georgia State University; Doug Duncan, Mortgage Bankers Association; Michael R. Englund, Action Economics, LLC; Gerard F. Fuda, Independent Economist; Stephen Gallagher, Societe Generale;  James Glassman, JP Morgan Chase & Co.; Global Insight; Keith Hembre, First American Funds; David Huether, National Association of Manufacturers; William B. Hummer, Wayne Hummer Investments; Saul Hymans, Joan Crary, and Janet Wolfe, RSQE, The University of Michigan; Fred Joutz, Benchmark Forecasts and Research Program on Forecasting, George Washington University; Kurt Karl, Swiss Re; Dr. Irwin Kellner, Hofstra University/MarketWatch/ North Fork Bank; Thomas Lam, UOB Group; L. Douglas Lee, Economics from Washington; Joseph Liro, Stone & McCarthy Research Associates; John Lonski, Moody’s Investors Service; Dean Maki, Barclays Capital; Edward F. McKelvey, Goldman Sachs; Jim Meil, Eaton Corporation; Anthony Metz, Pareto Optimal Economics; Michael Moran, Daiwa Securities America; Joel L. Naroff, Naroff Economic Advisors; Michael P. Niemira, International Council of Shopping Centers; Martin A. Regalia, U.S. Chamber of Commerce; David Resler, Nomura Securities International, Inc.; David Rosenberg, Merrill Lynch; John Ryding, Bear, Stearns, and Company, Inc.; David F. Seiders, National Association of Home Builders; Xiaobing Shuai, Ph.D., Chmura Economics & Analytics; Sean M. Snaith, Ph.D., University of the Pacific; Constantine G. Soras, Ph.D., Verizon Communications; Neal Soss, Credit Suisse First Boston; Stephen Stanley, RBS Greenwich Capital; Susan M. Sterne, Economic Analysis Associates, Inc.; Thomas Kevin Swift, American Chemistry Council; David Teolis, General Motors Corporation; Gary Thayer, A.G. Edwards; Lea Tyler, Oxford Economics USA, Inc.; Albert M. Wojnilower; Richard Yamarone, Argus Research Group; Mark Zandi, Economy.com; Ellen Beeson Zentner, Bank of Tokyo-Mitsubishi UFJ, Ltd.

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.

For further information about the Survey of Professional Forecasters, contact:

Tom Stark
Federal Reserve Bank of Philadelphia
Ten Independence Mall
Philadelphia, PA 19106
e-mail: PHIL.SPF@phil.frb.org

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NEXT SURVEY RELEASE (2006 Q3): August 14, 2006a

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