Economic outlook dims

The outlook for economic growth over the next two years looks less rosy than it did just three months ago, according to 33 forecasters surveyed by the Federal Reserve Bank of Philadelphia. In the current year, the forecasters see the economy expanding at a rate of just 1.7%-- a downward revision of 0.3% from their forecast of 2.0% made three months ago.

The outlook brightens a bit in 2002, since the forecasters expect growth to rebound to 2.65/a. However, that projection is down from the forecasters' projection of 2.8% in the last survey. On a quarterly basis, the forecasters see growth recovering over the next five quarters, from 1.20/a in the current quarter to 3.9% of 2002.

A slightly worse outlook for the unemployment rate accompanies the downward revision to real GDP growth. Currently, the forecasters expect that rate to average 4.6% in 2001, a bit higher than their previous projection of 4.5%. Unemployment will climb to an annual average rate of 4.9% in 2002, up 0.1% from the forecast of three months ago. Over the next five quarters, as the rate of growth in real GDP rebounds, the forecasters expect unemployment to follow a hump-shaped path, rising from a projected rate of 4.7% in the third quarter of 2001, peaking at 5.0% in the first quarter of 2002, and falling to a steady 4.9% thereafter.

The forecasters' expectation for near-term inflation in 2001 is unchanged from that of the last survey. Measured by the fourth-quarter over fourth-quarter rate of change in the CPI, inflation will average 3.0% in 2001, the same rate expected in the last survey. Deceleration is in the cards for 2002, as the forecasters currently project that CPI inflation will fall to 2.7% percent in that year. Previously, the forecasters thought CPI inflation would average 2.5% in 2002.

In the previous survey's results, the forecasters' projections for short- and long-term interest rates implied sizable upward revisions to the projected yield spread (measured as the difference between long- and short-- term interest rates) - a variable that some analysts believe is useful for predicting future levels of economic activity. That trend continues in the present survey. For 2001, the forecasters project that the rate on three-- month Treasury bills will average 3.8%, down from 3.9% in the last survey, and the rate on 10-year Treasury bonds will average 5.2%, up from 5.1% previously.

Thus, the implied projection for the yield spread in 2001 currently stands at 1.4%, marking an upward revision of 0.20/a from the previous projection of 1.2%. A larger upward revision characterizes the outlook for 2002: the forecasters` current projection for the yield spread stands at 1.8%, an increase of 0.6% over the previous forecast.