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Second Quarter 2007 Survey of Professional Forecasters

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Forecasters See Little Reason to Revise Their Outlook for Core Inflation

The outlook for core inflation, measured by either the price index for personal consumption expenditures (PCE) excluding food and energy or the consumer price index (CPI) excluding food and energy, looks about the same now as it did three months ago, according to 53 forecasters surveyed by the Federal Reserve Bank of Philadelphia. Core PCE inflation will average 2.1 percent on a fourth-quarter over fourth-quarter basis in each of the next three years. These projections are nearly unchanged from those of the previous survey, when the forecasters thought core PCE inflation would average 2.0 percent in 2007 and 2.1 percent in each of the following two years. The accompanying charts show, for core PCE inflation in 2007 (See Chart) and 2008 (See Chart), how the forecasters have changed their estimates of the probability that inflation will fall in each of 10 different ranges.

Not surprisingly, the mean probabilities in the current survey are highest for the range of inflation, 2.0 percent to 2.4 percent, that includes the forecasters’ point estimate of 2.1 percent in each of the next two years. The forecasters see a slightly higher chance that inflation will fall in this range, compared with their previous estimates. A better than one-in-four chance characterizes the probability that core PCE inflation will average between 1.5 percent and 1.9 percent in each of the next two years.

The forecasters expect core CPI inflation to average 2.30 percent (fourth-quarter over fourth-quarter) in each of the next three years. These projections are unchanged from those of the previous survey.

The short-run projections for CPI and PCE measures of inflation that include food and energy prices (headline) are higher than the projections for core inflation, but the differences moderate as the forecast horizon lengthens.

The forecasters’ views on the long-run outlook for inflation remain roughly unchanged from the last survey. Currently, they see headline CPI inflation averaging 2.45 percent over the next five years and 2.40 percent over the next 10 years. Both projections are just five basis points higher than those of the previous survey. At 2.40 percent, the current 10-year CPI projection remains below the level of 2.50 percent that had, until the previous survey, characterized the majority of the surveys since 1998. In fact, this is the first survey since we started asking this question to mark two consecutive surveys in which the projection for 10-year CPI inflation is below 2.50 percent. Headline PCE inflation will average 2.08 percent over the next five years, down from 2.10 percent previously, and 2.00 percent over the next 10 years, unchanged from the previous survey.

Reduced Estimates for Growth in 2007, Even as the Outlook for the Labor Market Holds Steady

The forecasters have cut their estimates for growth in 2007, even as their outlook for the labor market holds about steady. On a year-over-year basis, real GDP will grow 2.1 percent in 2007, down 0.7 percentage point from the previous estimate of 2.8 percent. This downward revision is temporary, as the forecasters see growth rebounding in 2008, to 2.9 percent, nearly the same rate they expected in the last survey. The outlook for the labor market, in contrast, looks about the same now as it did three months ago. The unemployment rate is expected to average 4.6 percent this year, down from 4.7 percent previously, and 4.8 percent next year, unchanged from the previous survey. On the jobs front, the forecasters see nonfarm payrolls increasing at a rate of 151,000 jobs per month in 2007 and 122,000 per month in 2008. Previously, the forecasters thought nonfarm payroll employment would rise 135,000 per month in 2007 and 131,000 per month in 2008.

The accompanying charts show how the forecasters have revised their estimates of the probability that year-over-year growth in real GDP will fall into each of six ranges. Growth in 2007 (See Chart) is most likely to fall in the range of 2.0 to 2.9 percent, just as the forecasters estimated in the last survey. However, compared with their estimates three months ago, the forecasters see a much higher chance that growth will fall in the lower range of 1.0 to 1.9 percent. In 2008 (See Chart), the forecasters are assigning the highest probability to growth in the range 2.0 to 2.9 percent. Previously, the highest probability was assigned to growth in the range 3.0 to 3.9 percent.

Little Change to Estimates of the Chance for a Negative Quarter

The forecasters have not much altered their assessment of the risk for a quarter of negative growth in real GDP, even though they have cut their estimates for growth in 2007. The forecasters see an 11.75 percent chance of negative growth in the current quarter, down slightly from 13.14 percent in the last survey. The forecasters have raised their estimates over the next three quarters, but not by much.

Nearly Flat Path for Three-Month Treasury Bill Rates

A nearly flat path for short-term interest rates accompanies the forecast. The panelists see the rate on three-month Treasury bills holding steady at 5.0 percent in the middle of the year, before falling just 0.10 percentage point, to 4.9 percent, over the next three quarters. This is the same path the forecasters expected in the last survey. On an annual-average basis, the three-month rate will average 5.0 percent this year and 4.9 percent next year. On the long end of the maturity spectrum, the rate on 10-year Treasury bonds will average 4.7 percent in 2007, down from 4.9 percent in the last survey, and 4.9 percent in 2008, down from 5.0 percent previously

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

Scott Anderson, Wells Fargo and Company; Robert J. Barbera, ITG Inc.; David W. Berson, Fannie Mae; Joseph Carson, Alliance Capital Management; Gary Ciminero, CFA, Rhode Island House Policy Office; Louis Crandall, Wrightson ICAP LLC; 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; William B. Hummer, Wayne Hummer Investments; Saul Hymans, Joan Crary, and Janet Wolfe, RSQE, 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; Jack Kleinhenz, Kleinhenz & Associates, Inc.; Thomas Lam, UOB Group; L. Douglas Lee, Economics from Washington; Mickey D. Levy, Bank of America; Joseph Liro, Stone & McCarthy Research Associates; John Lonski, Moody’s Investors Service; Macroeconomic Advisers, LLC; Dean Maki, Barclays Capital; Drew Matus, Lehman Brothers; 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; Mark Nielson, Ph.D., MacroEcon Global 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; 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., Verizon Communications; Neal Soss, Credit Suisse; Stephen Stanley, RBS Greenwich Capital; Susan M. Sterne, Economic Analysis Associates, Inc.; Thomas Kevin Swift, American Chemistry Council; David Teolis, General Motors Corporation; 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.

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

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.

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The survey for 2007 Q3 will be released on August 14, 2007.

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Tom Stark
Federal Reserve Bank of Philadelphia
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PHIL.SPF@phil.frb.org E-mail