NABE PANEL BELIEVES THAT FED'S JOB IS FAR FROM DONE
May 2000
Michael R. Englund
Standard & Poor?s MMS
NABE Outlook Writer
MGJ's Comments: Does anyone believe the economy is beginning to slow already and that the rate increase due tomorrow may or may not be followed by one more and place the Federal Reserve on hold for awhile?
The NABE Outlook presents the consensus of macroeconomic forecasts made by a panel of 32 professional forecasters from the membership of the National Association for Business Economics. The survey was taken in May. May be reprinted in whole or in part with credit given to NABE.
NABE Outlook Highlights
The NABE forecast panel believes that the economy will grow by a hefty 4.9 percent in 2000 but will post only 3.0 percent growth in 2001. The forecast for a slowdown has been a constant feature of the survey. The role that the Fed plays in achieving that slowdown, however, has increased dramatically.
Inflation, as measured by the Consumer Price Index (CPI) on a Q4/Q4 basis, is expected to rise to 2.9 percent in 2000 and 2.7 percent in 2001 from the 2.6 percent gain in 1999. The GDP deflator, which is a broader measure of inflation, is expected to rise 2.0 percent in 2000 and 2.2 percent in 2001 from the 1.5 percent gain in 1999.
The unemployment rate is expected to fall in 2000 to 4.0 percent from 4.2 percent in 1999, but is then expected to return to 4.2 percent in 2001 due to a slowing economy.
Additional Fed moves are expected, with 75 percent of respondents predicting another seventy-five to one hundred basis points of monetary tightening. There is some concern among respondents, however, that the U.S. economy is less interest-rate sensitive than it once was. This suggests that the Fed may have to act more aggressively than it did in the past to engineer a slowdown.
When asked about the impact of the recent correction in tech stock prices, a stunning 97 percent majority said that it had no impact on their forecasts. Respondents largely agreed by an almost two-to-one margin, however, that productivity growth would slow if the tech stock correction resulted in a slowdown in capital spending.
Strong economic reports between the February and May NABE Outlook Surveys have prompted sizable upward revisions in most real sector forecasts for 2000. Yet, forecasts for 2001 continue to reveal expectations of a sharp slowdown in growth that will allow a small rise in the unemployment rate and a moderation in inflation in the coming year. The slowdown can be attributed to an expected continuation of the Federal Reserve?s tightening cycle to an eventual late-2000 target of 6.75 or 7.00 percent.
The results of our NABE Outlook Survey reveal upward revisions in nearly all the major economic aggregates, with particularly large revisions in the consumption, motor vehicle, and industrial sector figures. The only downward revisions were seen in forecasts for exports, which boosted estimates of the trade deficit in both 2000 and 2001 and, interestingly, in compensation per hour. The median estimate of the unemployment rate fell to a remarkably low 4.0 percent rate in 2000, which reflects the widespread strength that the NABE Survey Panel expects to see in the 2000 economy.
Contrary to previous forecasts, where the economy was either expected to slow of its own volition or in response to a modest tightening of monetary conditions, the slowdown in 2001 is expected to occur with more aggressive tightening of monetary conditions. When asked the level of the Federal funds rate target at the end of 2000, 75 percent of respondents were split between a 6.75 and a 7.00 percent rate. The median forecast for growth in the May survey for 2001 are nearly the same as the February medians, despite the upward revisions in nearly all forecasts for 2000.
The Economy in Detail
The upward revisions in the 2000 real sector forecasts of the NABE Panel since the February survey were largely due to strength in the reported GDP figures for the first quarter, combined with strength in the early monthly statistics for April that boosted forecasts for the second quarter as well. The median forecast for real GDP growth in 2000 surged from 3.2 to 3.9 percent on a Q4/Q4 basis, and to 4.9 percent from 3.8 percent on a year-average basis.
The unexpected strength in the 2000 economy was heavily concentrated in consumption, motor vehicle and industrial sector activity, though nearly all of the major GDP component forecasts except exports revealed upward revisions since the February survey. Real consumption growth in 2000 is now expected to repeat its robust 5.3 percent gain of 1999, while motor vehicle sales should reach 17.1 million units in 2000 versus 16.8 million units in 1999. Growth in industrial production should accelerate to 4.8 percent in 2000 following a 3.5 percent gain in 1999, and this should allow the capacity utilization rate for manufacturing to rise to 80.8 percent in 2000 from 79.8 percent. Further evidence of strength in 2000 should include a 10.8 percent gain in fixed investment, import growth of 10.1 percent that will sharply outpace a 6.9 percent growth rate in exports due to rapid growth in domestic demand, and a steady rate of inventory accumulation of $45 billion.
In keeping with strength in economic figures, market forecasts for nonfarm productivity growth in 2000 were raised to 3.2 percent from the 2.6 percent increase estimated earlier. Remarkably, estimates for growth in compensation per hour were actually nudged lower to 4.6 percent in 2000 from 5.0 percent, despite strength in the wage and benefit cost figures for the first quarter. Yet, estimates for inflation were raised, with the estimate for the Q4/Q4 gain in CPI in 2000 now at 2.9 percent versus the 2.5 percent seen in the last survey. Though economists expect CPI growth to subside in 2001, the estimated gain for this year was bumped higher to 2.7 percent from 2.6 percent in response to recent data. Because most economists expect petroleum prices to fall through 2000, the projections for the total imply rising core inflation through the period.
Interest Rates
"Additional Fed moves are expected" The quarterly median forecasts from the NABE survey panel reveal that participants expect U.S. interest rates at both the long and short end of the maturity spectrum to rise through the end of the summer months, but to then stabilize as evidence of an economic slowdown materializes. Rates on 3-month bills are expected to rise from 5.69 percent at the end of the first quarter to 6.00 percent at the end of the current quarter and 6.29 percent at the end of the third quarter, where rates are expected to stall through early-2001. Bond yields are also projected to rise, with an increase in the 30-year Treasury yield to 6.20 percent at the end of the current quarter from 6.05 percent at the end of last quarter. A 6.25 percent yield is expected to prevail through the second half of the year. In 2001, most participants expect both long and short-term yields to subside as real economic growth slows to a pace that falls short of a sustainable rate. This slowdown should allow the unemployment rate to rise to 4.2 percent, while housing starts fall to 1.50 million units and light vehicle sales drop to 16 million units.
Participants were asked their estimates for the Federal Reserve?s funds rate target at year-end, and three quarters of participants expected a target in the 6.75-7.00 percent range. The profile of bill yields implies that participants expect this target to be achieved by Labor Day, however, which means that further tightening was assumed by most of the participants at either the June and/or August FOMC meetings.
Mixed Views on the New Economy and Fiscal Policy
The NABE Survey Panel was asked several questions about the new economy and fiscal policy, and the responses suggest that participants have mixed views about recent changes being discussed in the economy.
Regarding the new economy, a majority of 62 percent of participants believe that the economy is now less sensitive to changes in interest rates than in the past. Yet, 34 percent did not think that interest rate sensitivity had changed, and the remainder had no opinion. When asked whether the recent correction in prices for technology stocks had impacted their outlooks, an astounding 97 percent said no. When asked if productivity growth would post a noticeable slowdown if high technology capital spending slows in response to the stock market sell-off, a small majority of 59 percent again said yes with the remainder saying no. Though NABE Survey Panelists are tracking the ?new economy,? the ?old economy? sectors are still playing a large role in their forecasts.
Regarding fiscal policy, participants were asked if they are assuming tax cuts or spending increases for the coming administration in constructing their 2001 economic outlooks. A large portion of 44 percent are assuming no change, and nearly as much, at 41 percent, are hedging their bets and assuming both. The remainder expect spending increases with no tax cuts. Participants were also asked to address the impact of the ongoing budget surplus on the liquidity of the Treasury market. In specific, they were asked which yield curve had the most important impact on their macro forecast, and they were given four choices. Though many respondents were undecided, 41 percent said the Treasury yield curve was most important, while 34 percent said the corporate yield curve, 6 percent said the swap curve, and the remaining 19 percent said all were equally important.
Economy Less Sensitive to Interest Rates?
Stock Market Sell-off to Slow Down Productivity?
Tax Cuts or Spending Increases?
Which Yield Curve is Most Important?
NABE OUTLOOK
History of NABE Survey Results
(Median Forecast Reported)
2000 Forecasts 2001 Forecasts
1999 May-99 Sep-99 Nov-99 Feb-00 May-00 Feb-00 May-00
Actual Survey Survey Survey Survey Survey Survey Survey
ANNUAL AVERAGES
Real GDP & Components:
Real GDP 4.20% 2.50% 2.70% 3.20% 3.80% 4.90% 3.00% 3.00%
Personal Consumption Expenditures 5.30% 2.80% 3.00% 3.50% 4.10% 5.30% 2.90% 3.00%
Business Fixed Investment 8.30% 6.40% 6.90% 8.30% 8.20% 10.80% 6.80% 6.70%
Residential Investment 7.40% -1.00% -2.60% -3.80% -2.10% 0.40% -0.60% -2.50%
Change in Business Inventories(B$) $42.20 $39.80 $39.00 $36.20 $42.30 $44.80 $40.50 $43.30
Government Purchases 3.70% 1.50% 1.70% 2.00% 2.70% 3.00% 2.00% 2.00%
Net Exports (Billions $) ($323.00) ($333.00) ($345.00) ($355.50) ($373.80) ($390.00) ($375.60) ($385.40)
Exports 3.80% 5.70% 5.90% 7.70% 7.90% 6.90% 8.70% 8.50%
Imports 11.70% 6.90% 7.00% 9.00% 9.90% 10.10% 6.40% 6.60%
Nominal Magnitudes:
Merchandise Trade Balance (Bils) ($330.10) ($290.00) ($306.40) ($370.00) ($391.00) ($410.00) ($400.00) ($420.00)
Federal Budget Surplus(FY)(Bils) $124.40 $125.00 $128.00 $145.30 $175.00 $185.00 $190.00 $200.00
Corporate Profits (after tax) 8.80% 1.90% 2.70% 4.40% 6.00% 7.90% 3.50% 3.40%
Nonfarm Compensation/Hour 4.70% 4.10% 4.10% 4.50% 5.00% 4.60% 4.90% 4.80%
Nonfarm Output/Hour 3.00% 1.60% 1.70% 2.00% 2.60% 3.20% 2.40% 2.30%
Real Magnitudes:
Unemployment Rate (Civilian) 4.20% 4.50% 4.40% 4.30% 4.10% 4.00% 4.30% 4.20%
Industrial Production 3.50% 2.30% 2.70% 2.90% 3.90% 4.80% 3.00% 3.30%
Capacity Utilization Rate, Mfg. 79.8 79.1 79.9 79.8 80.4 80.8 80.2 80.6
Housing Starts (MM) 1.68 1.5 1.5 1.5 1.55 1.6 1.5 1.5
Light Vehicle Sales (MM) 16.8 15.7 15.9 15.9 16.3 17.1 15.9 16
Inflation and Interest Rates:
Consumer Price Index 2.20% 2.40% 2.30% 2.50% 2.50% 3.00% 2.60% 2.70%
GDP Price Index 1.50% 1.70% 1.70% 1.60% 1.80% 2.00% 2.00% 2.20%
Treasury Bills (3 month) 4.64% 4.55% 5.00% 5.20% 5.72% 6.03% 5.65% 6.03%
Treasury Bonds (30 year) 5.87% 5.60% 5.99% 6.16% 6.50% 6.24% 6.22% 6.09%
4th QUARTER TO 4TH QUARTER
Real GDP 4.60% 2.30% 2.60% 2.90% 3.20% 3.90% 3.00% 3.00%
Consumer Price Index 2.60% 2.30% 2.30% 2.40% 2.50% 2.90% 2.60% 2.70%
National Association for Business Economics
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Phone: 202-463-6223 ? Fax: 202-463-6239 |
