The Current NABE Forecast
Thursday, May 28th, 2009Given uncertainty related to the strength of the economy it is understandable that people look to experts for forecasts. The National Association for Business Economics (NABE) is a very good source of economic forecasts. The May 2009 NABE Outlook (see: http://www.nabe.com/) reported continued tight credit markets, significant job losses, and declining home prices, and a very sharp contraction in real GDP during the first half of 2009 and then very low rates of economic growth starting later in the year. The forecast represents the consensus of macroeconomic forecasts that have been prepared by a panel of 45 professional forecasters.
The current forecast is for real GDP to decline at an annual rate of 1.8% during the second quarter of 2009. This follows a severe decline in real GDP at an annual rate of 6.1% during the first quarter of 2009. This is the worst performance for the economy since 1957-1958. Very slow growth is expected later this year. Overall, it is expected that real GDP will decline 1.2% in 2009, and then show steady economic growth equal to 2.7% in 2010. These poor results reflect relatively weak results for consumer spending and business investment. Still, the housing market and the significant decline in wealth due to declining home values and the poor credit and stock markets are the primary reasons for continued weakness. Well below trend levels of housing starts and declining home prices are expected for 2009. Only 560,000 housing starts are expected in 2009, and only 840,000 are expected for 2010. The majority of analysts expect the housing market to actually reach its bottom by the end of 2009.
The consumer price index is expected to decline 0.7% in 2009 due to weakness in the economy and large declines in commodities prices, but this deflation should not continue into 2010 as it is expected the inflation rate will equal 1.7% in 2010. Given the absence of inflationary pressures the Federal Reserve can continue its very aggressive monetary policies. The consensus of the economists who were surveyed by NABE is that the Federal Reserve will leave the federal funds rate target this year at nearly 0.0%, but that it will raise it to the still very low rate of 1.25% by the end of 2010. The expectation is that long-term interest rates will also remain relatively low. The yield on the 10-year Treasury note is expected to equal 3.30% at the end of 2009 and increase to 3.80% by year-end 2010. These relatively low long-term interest rates, party the result of aggressive monetary policies, and will contribute to relatively low mortgage rates.
The strength of the dollar is important to those who are interested in traveling and those who import and export goods and services. The dollar has strengthened since the financial markets crisis deepened during the second half of 2008 as global economic weakness led investors to purchase dollar denominated assets to try to hedge against risk. One Euro bought 1.58 dollars in July 2008, but bought only 1.32 dollars in January 2009. The economists expect the dollar to continue to be relatively strong in 2009 and 2010. One Euro is expected to be able to buy 1.33 dollars in 2009 and 1.34 dollars in 2010. Reflecting the expectation that the economy will start to strengthen later in 2009, the S&P 500 Index is expected to end 2009 at 975 and end 2010 at 1090.
There are other very good resources on the internet for forecasts related to the economy and specific economic indicators. Among the good resources include websites for the Congressional Budget Office (http://www.cbo.gov/), Mortgage Bankers Association (http://www.mbaa.org/), National Association Home Builders (http://www.nahb.org/), Freddie Mac (http://www.freddiemac.com/), and RSQE Forecasts (http://www.umich.edu/~rsqe/).