Growth in
A slightly weaker near-term outlook for the labor market accompanies the outlook for slower growth. On the jobs front, the forecasters see non-farm payroll employment expanding at a rate of 125,000 jobs per month this quarter, down from 166,000 in the last survey. Somewhat smaller downward revisions to job gains characterize the following two quarters. Over the next two years, the forecasters see jobs expanding at a pace of 154,000 per month in 2006, down from 170,000 previously, and 126,000 per month in 2007, down from 138,000. The forecasters see the rate of unemployment averaging 4.7 percent this quarter, the same rate they expected in the last survey, although they expect it to rise over the next few quarters at a pace that is a bit faster than they previously thought. Currently, the forecasters see unemployment rising to 4.9 percent in the second quarter of 2007. In the previous survey, unemployment was expected to rise to 4.8 percent over the same period.
Upward revisions to inflation — measured by either the growth in the consumer price index or the price index for GDP — accompany the outlook for the real side of the economy. The forecasters have raised their projections for CPI inflation over each of the next four quarters. They now think CPI inflation will average 3.6 percent (annual rate) this quarter, up a full percentage point from their previous estimate. Smaller upward revisions characterize the next few quarters. Similarly, projections for inflation in the GDP price index are also higher, particularly in the current quarter. On a fourth-quarter over fourth-quarter basis, CPI inflation will average 3.3 percent this year and 2.6 percent next year, up from 2.6 percent and 2.4 percent, respectively, in the last survey. The forecasters have also revised upward their annual forecasts for the rate of inflation (annual-average over annual-average) in the GDP price index.
Little Change to Longer-Horizon Inflation Forecasts
Although the near-term outlook for CPI inflation has worsened in this survey, the outlook over longer horizons is holding relatively unchanged. In answer to a special question, the forecasters have raised their expectations for CPI inflation in 2008, from 2.35 percent last survey to 2.50 percent this survey. However, the forecast for the annual average rate of inflation over the next 10 years is holding steady at 2.50 percent, the same rate the forecasters have expected since the late 1990s. Over the first five years of this horizon (2006 to 2010), CPI inflation is expected to average 2.60 percent, up marginally from the previous forecast of 2.50 percent. Over the second five years of the 10-year horizon (2011 to 2015), the forecasters have lowered their projection to 2.45 percent from their previous estimate of 2.50 percent. These results suggest that the factors the forecasters anticipate will increase inflation over the next few years will not persist and lead to permanently higher inflation.
Equilibrium Unemployment Pegged at 4.95 Percent
In third-quarter surveys, the Philadelphia Fed asks the forecasters to provide their estimates of the natural rate of unemployment — the rate of unemployment that occurs when the economy reaches equilibrium. For the third-quarter surveys conducted since 2001, the following table tracks the median estimate of the natural rate (computed from the responses of those forecasters who use the natural rate concept in preparing their projections), as well as the percentage of forecasters who use the concept and the lowest and highest estimates (among those who use the concept). Twenty-six of the 49 participants who answered the question report that they use the natural rate in their forecasts. Among these 26, the median estimate for the natural rate is 4.95 percent, nearly the same estimate recorded in the survey of a year ago, and close to the forecasters’ projection for the annual average rate of actual unemployment in 2007. The lowest estimate of the natural rate is 4.0 percent, and the highest estimate is 5.5 percent.