Fed SEP projections of growth are less optimistic, more accurate

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The Federal Reserve began issuing a quarterly Summary of Economic Projections in 2007, with expectations for gross domestic product, inflation and the fed funds rate.

The early dot plots were characterized by overly optimistic projections for gross domestic product, which were later revised down, while the projections made after 2017 have been somewhat pessimistic, but more accurate, according to research by the Federal Reserve Bank of San Francisco.

“Growth forecasts by Federal Open Market Committee meeting participants were persistently too optimistic for 2008 through 2016,” according to Kevin J. Lansing, a research advisor in the Bank’s Economic Research Department, and Winnie Yee is a research associate in the department. “The typical forecast started out high but was revised down over time, often dramatically, as incoming data failed to meet expectations.”

The forecasts were adjusted down by an average of 1.6 percentage points a year, 1.3 if the years of the Great Recession are excluded, the authors say. “This figure is substantial considering that the average compound growth rate of U.S. real GDP for the decade following the end of the Great Recession was 2.3%,” they write.

But the pattern eventually changed. The forecasts for 2017-2019 “started low but were revised up over time,” they write in an Economic Letter. “Cumulative forecast revisions for these years were much smaller on average than in the past.”

The later projections were close to 2%, near the expected trend for longer term growth, and were later revised higher, “implying some conservatism in the initial forecasts.” The authors said “the cumulative forecast revisions for these years are much smaller on average than in the past,” just 0.5 percentage points a year.

The findings suggest that members “adjusted their forecast methodology, including lowering estimates of trend growth, to eliminate the prior optimistic bias.”

Inflation expectations were steady in the New York Fed’s January Survey of Consumer Expectations, with both the one-year and three-year figures remaining at 2.5%, with “slightly” less uncertainty.

Median earnings growth expectations gained to 2.6% in January from 2.2% a month before, surpassing the 12-month trailing average of 2.4%. “The increase was broad-based across age and income groups,” the Fed said.

Spending growth expectations grew to 3.0% from 2.9%, below the 3.2% trailing 12-month.

Separately, the Conference Board Employment Trends Index gained to 110.24 in January from a downwardly revised 108.84 in December. The ETI increased 0.7% from January 2019.

The index has been in a range between 108.47 and 110.90 from June 2018.

“The Employment Trends Index increased in January, signaling solid job growth in early 2020,” said Gad Levanon, head of the Conference Board Labor Markets Institute. “The improvement in the ETI, along with Friday’s job report and other indicators, suggest that employment growth has been accelerating after several weak quarters in 2019. The improvement in labor force participation — especially for women — and the noticeable, yet still modest, improvement in labor productivity is providing the U.S. economy with more room to grow in 2020, despite historically tight labor markets.”

Seven of eight components were positive in January (from biggest contributor to smallest): initial claims for unemployment insurance, the percentage of respondents who say they find “jobs hard to get,” the percentage of firms with positions not able to fill right now, the ratio of involuntarily part-time to all part-time workers, real manufacturing and trade sales, job openings, and industrial production.

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Monetary policy Federal Reserve FOMC Economic indicators Federal Reserve Bank of San Francisco