A New Perspective on Long Term GDP Growth

Measured on the basis of chain-weighted indexes, the forecasts of the growth in real GDP had a central tendency of 2 to 2-1/4 percent and a full range of 1-1/2 to 2-1/2 percent for the period from the third quarter to the fourth quarter.

The members and nonmember presidents generally anticipated that economic expansion in line with their forecasts would be associated with employment growth close to that of the labor force. Accordingly, their forecasts of the civilian rate of unemployment in the fourth quarter were near the current level, with a central tendency of 5-1/2 to 5-3/4 percent and a full range of 5-1/2 to 6 percent. Projections of the rate of inflation, as reflected in the consumer price index, had a central tendency of 2-3/4 to 3 percent; that central tendency was on the high side of the outcome - when the rise in the index was held down by damped increases in food prices and declines in energy prices--but a few of the forecasts anticipated a slightly lower rate of inflation.

In their review of developments across the nation, the Federal Reserve Bank presidents reported modest growth in most major areas of the country. Many referred, however, to an admixture of strengths and weaknesses in their local economies, and a majority observed that on balance growth in regional business activity appeared to have slowed in the last few months. In keeping with the data available for the nation as a whole, the slowing seemed to be concentrated in manufacturing and especially at firms producing motor vehicles and parts. Some presidents referred to relatively negative, or at least cautious, sentiment among many of their business contacts.

Much of the recent softening in economic activity appeared to arise from production cutbacks in various sectors of the economy where involuntary accumulation of inventories seemed to have occurred as a result of weaker sales trends in the past few months. The members expected this inventory adjustment process to have a relatively pronounced effect on production and overall business activity in the current quarter and perhaps to some extent in the second. While a greater-than-expected inventory adjustment with spreading effects through the economy could not be ruled out, the underlying strength of demand was likely to be sufficient to restore and sustain moderate growth in overall economic activity as the current inventory and production adjustments subsided.

With regard to consumer spending, members referred to overall indications of lackluster retail sales during the holiday season and into January. The anecdotal commentary on retail sales attributed some of the recent weakness in a number of areas to the clearly temporary effects of unusually severe winter weather and the partial shutdown of the federal government. The members anticipated that moderate growth in retail sales would resume, though some felt that the consumer sector might remain vulnerable on the downside. The consumer spending outlook was complicated by a number of crosscurrents.