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Third Quarter 2010 Survey of Professional Forecasters

Listen to an interview with a research analyst about this quarter's survey. Audio Interview

Forecasters See Slower Pace of Economic Recovery

The outlook for growth in the U.S. economy looks weaker now than it did just three months ago, according to 36 forecasters surveyed by the Federal Reserve Bank of Philadelphia. The forecasters see real GDP growing at an annual rate of 2.3 percent this quarter, down from the previous estimate of 3.3 percent. On an annual-average over annual-average basis, the forecasters expect slower real GDP growth in 2010, 2011, and 2013.The forecasters see real GDP growing 2.9 percent in 2010, down from their prediction of 3.3 percent in the last survey. The forecasters predict real GDP will grow 2.7 percent in 2011, 3.6 percent in 2012, and 2.6 percent in 2013.

The downward revision to growth is accompanied by weaker conditions in the labor market. Unemployment is now projected to be an annual average of 9.6 percent in 2010, before falling to 9.2 percent in 2011, 8.2 percent in 2012, and 7.3 percent in 2013. These estimates are higher than the projections in the last survey. On the jobs front, the forecasters have revised downward the growth in jobs over the next four quarters. The forecasters see nonfarm payroll employment growing at a rate of 8,000 jobs per month this quarter and 114,100 jobs per month next quarter. The forecasters’ projections for the annual average level of nonfarm payroll employment suggest job losses at a monthly rate of 45,200 in 2010. Job gains in 2011 are seen averaging 143,800 per month, 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.)

 
Real GDP (%)
Unemployment
Rate (%)
Payrolls
(000s/month)
 
Previous
New
Previous
New
Previous
New
Quarterly data:
2010:Q3
3.3
2.3
9.6
9.6
120.5
8.0
Q4
2.8
2.8
9.5
9.6
153.3
114.1
2011:Q1
2.7
2.3
9.3
9.4
213.8
159.3
Q2
3.2
3.1
9.1
9.3
217.3
190.7
Q3
N.A.
3.0
N.A.
9.0
N.A.
189.9
Annual average data:
2010
3.3
2.9
9.6
9.6
-37.5
-45.2
2011
3.1
2.7
8.9
9.2
184.0
143.8
2012
3.2
3.6
8.0
8.2
N.A.
N.A.
2013
2.9
2.6
7.1
7.3
N.A.
N.A.

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 revised downward their estimate of the probability that growth will fall into the range of 3.0 to 4.9 percent in 2010, 2011, 2012, and 2013.

The forecasters’ density projections, as shown in the charts below, shed light on the odds of a recovery in the labor market over the next four years. Each chart presents the forecasters’ previous and current estimates of the probability that unemployment will fall into each of 10 ranges. The forecasters have raised the estimate of the probability that the annual average unemployment rate will be in the range of 9.5 to 10.9 percent in 2010 and 2011 compared with their previous estimate.

Forecasters Reduce Projections for Inflation, but See Little Risk of Deflation

The current outlook for the headline and core measures of CPI and PCE inflation during the next two years is lower than it was in the last survey. Over the next 10 years, 2010 to 2019, the forecasters expect headline CPI inflation to average 2.3 percent at an annual rate, down from 2.4 percent in the last survey. The 10-year outlook for PCE inflation of 2.11 percent is slightly lower than that of the last survey.

Short-Run and Long-Run Projections for Inflation (Annualized Percentage Points)
 
Headline CPI
Core CPI
Headline PCE
Core PCE
Previous
Current
Previous
Current
Previous
Current
Previous
Current
Quarterly
2010:Q3
1.8
1.4
1.4
1.4
1.7
1.3
1.2
1.1
Q4
1.8
1.6
1.5
1.2
1.6
1.5
1.3
1.1
2011:Q1
1.9
1.8
1.5
1.2
1.8
1.7
1.4
1.4
Q2
2.0
1.6
1.6
1.4
1.7
1.5
1.5
1.4
Q3
N.A.
1.9
N.A.
1.6
N.A.
1.7
N.A.
1.5
Q4/Q4 Annual Averages
2010
1.6
0.9
1.0
0.9
1.4
1.2
1.2
1.1
2011
2.0
1.8
1.6
1.5
1.8
1.7
1.6
1.5
2012
2.4
2.1
2.0
1.9
2.0
1.8
1.8
1.7
Long-Term Annual Averages
2010-2014
2.19
2.00
N.A.
N.A.
1.80
1.82
N.A.
N.A.
2010-2019
2.40
2.30
N.A.
N.A.
2.15
2.11
N.A.
N.A.

The figures below show the probabilities that the forecasters are assigning to the possibility that fourth-quarter over fourth-quarter core PCE inflation in 2010 and 2011 will fall into each of 10 ranges. For 2010 and 2011, the forecasters assign a higher chance than previously that core PCE inflation will fall below 1.5 percent. Notably, the probability that inflation will be less than zero is small and nearly unchanged from the last survey.

Increased Chance of a Negative Quarter

A slightly higher chance of a downturn accompanies the forecast. The forecasters have revised upward the chance of a contraction in real GDP in any of the next four quarters. For the current quarter, they predict a 14 percent chance of negative growth, up from 9.8 percent in the survey of three months ago. As the table below shows, the panelists have also made upward revisions to their forecasts for the following three quarters.

Risk of a Negative Quarter (%)
 
Previous
New
Quarterly data:
2010:Q3
9.8
14.0
Q4
12.3
16.8
2011:Q1
14.1
16.5
Q2
14.8
15.0
Q3
N.A.
14.9

Equilibrium Unemployment Pegged at 5.78 Percent

In third-quarter surveys, we ask the forecasters to provide their estimates of the natural rate of unemployment — the rate of unemployment that occurs when the economy reaches equilibrium. The forecasters peg this rate at 5.78 percent, the highest rate over the last 15 years. The table below shows, for each third-quarter survey since 1996, the percentage of respondents who use the natural rate in their forecasts, and for those who use it, the median estimate and the lowest and highest estimates. Sixty-four percent of the 25 forecasters who answered the question report that they use the natural rate in their forecasts. The lowest estimate is 4.50 percent and the highest estimate is 6.80 percent.

Median Estimates of the Natural Rate of Unemployment
Survey Date
Percentage Who Use The Natural Rate
Median Estimate (%)
Low (%)
High (%)
1996:Q3
62
5.65
5.00
6.00
1997:Q3
59
5.25
4.50
5.88
1998:Q3
47
5.30
4.50
5.80
1999:Q3
43
5.00
4.13
5.60
2000:Q3
48
4.50
4.00
5.00
2001:Q3
34
4.88
3.50
5.50
2002:Q3
50
5.10
3.80
5.50
2003:Q3
41
5.00
4.31
5.40
2004:Q3
46
5.00
4.00
5.50
2005:Q3
51
5.00
4.25
5.50
2006:Q3
53
4.95
4.00
5.50
2007:Q3
52
4.65
4.20
5.50
2008:Q3
48
5.00
4.00
5.50
2009:Q3
61
5.00
4.00
6.00
2010:Q3
64
5.78
4.50
6.80

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

Robert J. Barbera, Mount Lucas Management; Jay Brinkmann, Mortgage Bankers Association; Joseph Carson, Alliance Capital Management; 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; Rajeev Dhawan, Georgia State University; Shawn Dubravac, Consumer Electronics Association; Michael R. Englund, Action Economics, LLC; Robert C. Fry, Jr., DuPont; Stephen Gallagher, Societe Generale; Timothy Gill, NEMA; James Glassman, JP Morgan Chase & Co.; Ethan Harris, Bank of America-Merrill Lynch; Peter Hooper, Deutsche Bank Securities, Inc.; William B. Hummer, Wayne Hummer Investments; IHS Global Insight; Peter Jaquette, PIRA Energy Group; Fred Joutz, Benchmark Forecasts and Research Program on Forecasting, George Washington University; Kurt Karl, Swiss Re; N. Karp, BBVA Compass; Walter Kemmsies and Daniel Solomon, Moffatt & Nichol; Jack Kleinhenz, Kleinhenz & Associates, Inc.; Thomas Lam, OSK Group/DMG & Partners; 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; Edward F. McKelvey, Goldman Sachs; Jim Meil, Eaton Corporation; Anthony Metz, Pareto Optimal Economics; Ardavan Mobasheri and Danielle Ferry, AIG Global Economic Research; Michael Moran, Daiwa Capital Markets America; Joel L. Naroff, Naroff Economic Advisors; Herbert E. Neil, Financial and Economic Strategies Corp.; Mark Nielson, Ph.D., MacroEcon Global Advisors; Michael P. Niemira, International Council of Shopping Centers; Luca Noto, Prima Sgr; Martin A. Regalia, U.S. Chamber of Commerce; David Resler, Nomura Securities International, Inc.; Philip Rothman, East Carolina University; 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; Constantine G. Soras, Ph.D., CGS Economic Consulting; Neal Soss, Credit Suisse; Stephen Stanley, Pierpont Securities; Susan M. Sterne, Economic Analysis Associates, Inc.; Thomas Kevin Swift, American Chemistry Council; Lea Tyler, Oxford Economics USA, Inc.; Jay N. Woodworth, Woodworth Holdings, Ltd.; Mark Zandi, Moody’s Economy.com; Ellen Beeson Zentner, Bank of Tokyo-Mitsubishi UFJ, Ltd.

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

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Third Quarter 2010 PDF

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The survey for 2010 Q4 will be released on November 15, 2010.

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

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