Feds Soft Rosy Outlook for 2006

U.S. Economic Growth Will Soften in 2006, Chicago Fed

Forecasts from Nineteenth Annual Economic Outlook Symposium

The nation’s economic growth will soften slightly in 2006, inflation
will decrease, and the unemployment rate will edge lower, according
to the median forecast of participants at the Federal Reserve
Bank of Chicago’s Economic Outlook Symposium. The consensus
outlook shows that real gross domestic product (GDP) is
forecast to increase 3.6% this year and 3.2% in 2006. Inflation,
as measured by the Consumer Price Index, is expected to rise
3.9% this year and then moderate to 3.0% in 2006. The unemployment
rate is forecast to fall to 5.1% by the end of this year
and edge down further to 5.0% by the end of 2006.

The nineteenth annual Economic Outlook Symposium, held in
Chicago on December 2, drew participants from manufacturing,
banking, auto industries, academia, consulting, and service firms.
One session of the Symposium presented the results from the
consensus economic outlook. This year, 32 individuals provided
forecasts for major components of real GDP as well as several
key statistics for the U.S. economy. The median forecast results
are presented in the table.

All major components of real GDP are expected to contribute
to the slight softening expected in economic growth next year,
particularly a projected flattening in residential investment.
Notably, the consensus outlook shows residential investment
to increase 7.0% this year and then fall 0.8% in 2006. Most major
real GDP components are forecasted to continue expanding
in 2006, albeit at a slower pace than in 2005. Symposium participants
anticipated that light vehicle sales will edge down to
16.8 million units in 2006. Oil prices are expected to decrease
to just above $55 next year. Additionally, real personal consumption
expenditures are projected to edge down from 3.1% this
year to 3.0% next year.

Housing starts are also expected to drop
slightly from 2.04 million in 2005 to 1.90 million in 2006.
However, industrial production growth is forecasted to improve
from a 2.4% increase in 2005 to a 3.2% increase next year.
Interest rates, both short term and long term, are expected to
rise roughly one-half percent in 2006. With both short-term
and long-term rates rising the same amount, this suggests that
the yield curve will stay relatively constant.

A summary of the nineteenth annual Economic Outlook
Symposium will be published in an upcoming issue of the
Chicago Fed Letter.

Note: This article is available on my website (http://www/rememberjim.com/blog)

—William A. Strauss • Senior Economist and
Economic Advisor