NABE forecasts slower economic growth for 2007

The May 2007 National Association for Business Economics Outlook presents the consensus of macroeconomic forecasts made by a panel of 48 professional forecasters. The survey, covering the outlook for 2007 and 2008, was taken April 19 to May 8, 2007.

“Results for the first portion of the year indicate that the expansion has descended from its cruising altitude,” said Carl Tannenbaum, NABE president and chief economist at LaSalle Bank/ABN AMRO, N.A., in Chicago. “However, the NABE forecast panel expects economic growth to overcome recent turbulence and return to greater heights over the coming year.”

Highlights

• The panel curbed expectations for 2007 economic growth. In light of first-quarter growth that was less than half the expected pace, the NABE forecasters reduced their estimate of the full-year advance in real gross domestic product to 2.3 percent (on a fourth-quarter-over-fourth-quarter basis). This decline from a reading of 2.8 percent in the February survey also reflects reduced expectations for business fixed investment and inventory accumulation. On a more positive note, expectations for this year’s personal consumption growth were not altered by the NABE panel. Real personal consumption expenditures are forecast to increase 3.2 percent this year, unchanged from the prior Outlook. In addition, more than half of the forecasters expect business capital spending to pick up significantly during the balance of 2007.

• The panel affirmed an expectation of stronger growth next year. The group’s call for 3.1 percent GDP growth over the four quarters of 2008 reflects a rebound in investment spending and inventories, along with an end to the housing correction. This pace of growth is a touch higher than the NABE survey’s group estimate of the non-inflationary rate of real growth, which stands at 3.0 percent.

• Residential investment remains a dominant force dampening growth in 2007. Nearly half of our forecasters think that the bottom in housing will not be reached until the fourth quarter of 2007 or later. Most respondents think that median home prices will decline this year, though the estimated drop is generally expected to be 3 percent or less. One-third of the panel thinks the problems in the subprime market are delaying or deepening the housing correction; significant fractions anticipate that subprime problems will hinder consumption or prompt significant changes in the regulation of the mortgage market.

• In response to a special question, more than half the panel sees at least a 25 percent chance of a recession getting under way within the next year. Still, less than a quarter see more than a one-third chance of a cyclical downturn starting.

• GDP growth may be getting some benefit from the external sector. The NABE panel is forecasting a modest improvement in real net exports this year. Contributing to this outlook is a weakening dollar; expectations for the greenback’s standing against the euro and against a trade-weighted basket of currencies were both adjusted downward. In a special question, NABE asked its community whether the risk of increased protectionism would hobble economic growth and efficiency over the next year. More than 70 percent indicated that the risk was not significant.

• NABE’s panel continues to look for moderate job growth this year and next with only a modest increase in the unemployment rate for next year. Expectations call for an increase in private employment of 1.3 percent this year, which would equate to 1.5 million new positions.

• Expectations for 2007 productivity growth have been reduced. Output per hour is now forecast to rise just 1.6 percent in 2007, down from 2.0 percent in the February survey; a pickup up to 2.3 percent next year is expected. Looking ahead a bit further, the plurality of panelists placed the central tendency for productivity growth in the range of 2.1 percent to 2.5 percent over the next few years. Most panelists do not see a major risk that more rapid growth in labor costs will stand in the way of moderation in inflation.

• The forecast of 2007 “headline” inflation increased dramatically. The consumer price index is now expected to rise by 2.9 percent for 2007. Rising energy prices appear to be among the culprits: the panel anticipates that the cost of a gallon of regular gasoline will average $3.00 at the end of June versus $2.87 a year ago. The panel does expect gas prices to ease to $2.75 a gallon by year end.

• By contrast, the NABE forecast for the 2007 increase in the core personal consumption expenditure (PCE) deflator dipped to 2.1 percent, just a tick above what many think is the Federal Reserve’s targeted level.

• Monetary policy, as reflected by the federal funds rate, should remain steady. The NABE panel left expectations for the funds rate at 5.25  percent for 2007. Looking ahead, the group does expect an easing of 25 basis points in 2008.

• Long-term interest rates are forecasted to be lower than projected in February but are expected to move up from current levels. The NABE panel expects 10-year Treasury notes to yield 4.90 percent by December of this year and 5.00 percent by the end of 2008.

• The panel’s assessment of risks to financial markets remains unchanged, with subprime mortgage lending continuing to be identified as posing the greatest risk to financial markets, and hedge funds staying second on this list. A majority of the panelists continue to expect an increase in risk premia this year, across the markets for stocks, bonds, commodities and real estate.