Economic Forecast and Survey on the State of the Economy
1998 Economic Forecast
Our panel of 18 Wall Street economists expects real gross domestic product (GDP) to average 3.4% in 1998, the same as in last month's survey. On June 25, the government reported the final estimate of first quarter real GDP which showed that the economy was growing at an annualized rate of 5.4%, up from the preliminary estimate of 4.8%. The consensus view is that the economy will downshift to a growth rate of 2.1% in the second quarter, 2.5% in the third quarter, and 2.7% in the fourth quarter. Individual estimates of quarterly growth in 1998 vary, however, with disagreement over the magnitude of the negative impact of the Asian currency crisis on exports, as well the degree to which the inventory build-up in the two prior quarters will serve as a drag on growth.
The panel, however, is more optimistic about the outlook for nonresidential fixed investment, which includes capital spending, than they were last month. At the same time, our panel is less optimistic about the year-over-year increase in industrial production than in last month's survey, due in large part to the economic crisis in Asia, and the General Motors strike. In addition, the panel is less optimistic about corporate profits in 1998 than they were last month, in light of the Asian financial crisis and the potential margin squeeze from tight labor markets in some sectors. The trade deficit in 1998 is expected to exceed $233 billion, which is greater than last month's estimate of over $223 billion.
There continues to be optimism about the outlook for the housing sector in 1998, given the forecast for strong employment growth, real disposable personal income gains, and consumer confidence, as well as the decline in mortgage interest rates.
Inflation, as measured by the Consumer Price Index (CPI), is expected to average 1.6%, the same as last month, but down sharply from an estimate of 2.2% in the January 1998 survey.
Our panel of economists remains divided over what the next move by the Federal Reserve's Open Market Committee (FOMC) will be when it occurs. Three month T-bills are expected to average 5.1%, the same as last month. The 30-year bond is expected to average 5.8%, down 10 basis points from last month, with corporate AAA bonds averaging 6.6%, up 10 basis points from last month.
1999 Economic Forecast
The panel is forecasting real growth of 2.5%, 2.4%, 2.2%, and 2.4%, for the first quarter through the fourth quarter of 1999, respectively. The consensus outlooks for nonresidential fixed investment and for industrial production in 1999 are more optimistic than last month. CPI inflation is expected to average 2.4% for the year. The unemployment rate is expected to average 4.6% in 1999, down from an estimate of 4.7% in last month's survey, but up only slightly from the 4.5% rate predicted for all of 1998. Once again, the trade deficit is expected to remain a problem, with the consensus estimate for 1999 now more than $261 billion.
1998 Consensus Estimates Survey Date
Economic Indicators Jul. '98 Jun. '98 May '98 Apr. '98 Mar. '98
Real GDP* (%) 3.4 3.4 3.1 3.0 2.9
CPI (%) 1.6 1.6 1.6 1.8 1.9
Industrial Production (%) 3.6 3.7 3.7 4.2 4.4
Disposable Income (%) 3.7 3.8 3.7 3.6 3.7
Corporate Profits (%) 2.8 3.1 3.4 3.9 4.1
Unemployment (%) 4.5 4.6 4.7 4.7 4.8
Housing Starts (Mil. units) 1.53 1.52 1.51 1.50 1.47
Net Exports ($Bil.) -233.4 -223.1 -207.9 -196.9 -171.9
1999 Consensus Estimates Survey Date
Economic Indicators Jul. '98 Jun. '98 May '98 Apr. '98 Mar. '98
Real GDP* (%) 2.5 2.5 2.6 2.4 2.4
CPI (%) 2.4 2.3 2.2 2.2 2.4
Industrial Production (%) 2.9 2.8 2.9 2.7 3.0
Disposable Income (%) 2.8 2.8 2.7 2.6 3.3
Corporate Profits (%) 2.1 3.0 2.9 1.8 1.6
Unemployment (%) 4.6 4.7 4.8 4.8 4.9
Housing Starts (Mil. units) 1.45 1.45 1.45 1.42 1.40
Net Exports ($Bil.) -261.9 -251.6 -236.3 -222.2 -187.8
*using chain-weighted method
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Economic Scenarios
For the month of July, we asked a panel of Wall Street economists the following question:
What is the probability, one year out, that our economy will be in the states designated below?
The following chart shows the average (in percent) of their current and historical responses:
bankamerica.com
Scenario Comment
Looking at the economic backdrop a year from now, the panel believes the chances for growth are still the most likely at 34%, up one percent from last month's survey. Chances for a slowdown are now 27%, down 5 percentage points from last month's survey. Chances of a boom rose 2% to 21%. The chances of stagflation, or of a stagnating economy accompanied by rising inflation, rose 2% to 18% this month.
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