Academic journal article Chicago Fed Letter

Economic Outlook Symposium: Summary of 2012 Results and 2013 Forecasts

Academic journal article Chicago Fed Letter

Economic Outlook Symposium: Summary of 2012 Results and 2013 Forecasts

Article excerpt

According to participants in the Chicago Fed's annual Economic Outlook Symposium, the U.S. economy is forecasted to grow at a pace near its historical average in 2013, with inflation remaining largely unchanged and the unemployment rate edging down.

The Federal Reserve Bank of Chicago held its twenty-sixth annual Economic Outlook Symposium (EOS) on November 30, 2012. More than 125 economists and analysts from business, academia, and government attended the conference. This Chicago Fed Letter reviews the forecasts for 2012 from the previous EOS, and then analyzes the forecasts for 2013 (see figure 1) and summarizes the presentations from the most recent EOS.1

The U.S. economy continues to recover from the longest and deepest drop in economic activity since the Great Depression. During the 13 quarters following the end of the recession in the second quarter of 2009, the annualized rate of real gross domestic product (GDP) growth was 2.2% - roughly in line with what is considered the long-term historical rate of growth for the U.S. economy. But this GDP growth rate is very disappointing given that real GDP fell from its peak by nearly 5% during the "Great Recession," which lasted for six quarters beginning with the first quarter of 2008. Generally, the pace of economic recovery is quite sharp following a deep recession. For example, consider what happened after the deep drops in economic output experienced during the mid-1970s and early 1980s; during the first 13 quarters of positive output following these two recessionary periods, the annualized rate of real GDP growth was 5.4% and 5.7%, respectively (significantly higher than that of the current recovery). That said, unlike the deep recessions of the mid-1970s and early 1980s, the Great Recession was accompanied by a major financial crisis. Recoveries both in the United States and in other countries that follow recessions associated with financial crises tend to be rather restrained.

The economy continued to progress slowly in 2012. For the first and second quarters of 2012, the annualized rates of real GDP growth were 2.0% and 1.3%, respectively. These rates were below the U.S. economy's long-term historical rate of growth. Economic activity improved in the third quarter of 2012, with the growth rate of real GDP rising to 3.1%. However, significant uncertainty in both the political and economic spheres may have been restricting economic growth during 2012.

Even with such sluggish growth, the economy continued to add jobs, but the number of jobs added from March 2010 through December 2012 was just under 4.8 million - around 55% of the neariy 8.7 million jobs lost from February 2008 through February 2010. In addition to making up for these lost jobs, the U.S. economy needs to generate jobs to accommodate all the new entrants into the labor force. During the past decade, the labor force in the U.S. economy increased by an average of 1.3 million each year, according to the U.S. Bureau of Labor Statistics. Thus, approximately 6 million workers have been added since the start of the recession. All of these factors are reflected in the very high unemployment rate, which stood at 7.8% in the fourth quarter of 2012.

Movements in oil prices have contributed to pronounced swings in inflation. Oil prices (of West Texas Intermediate) increased from roughly $85 per barrel in the fourth quarter of 2010 to about $94 per barrel in the final quarter of 2011. This increase in part explains the rise in inflation, as measured by the Consumer Price Index (CPI), from 1.2% in 2010 to 3.3% in 2011. Oil prices rose further to over $106 per barrel in the March 2012 before falling to around $88 per barrel in December 2012. In part because of the fall in oil prices, the year-over-year rate of inflation eased to 1.7% in the third quarter of 2012. Outside of the energy sector, the slack in production, labor markets, and other parts of the economy has kept inflationary pressures low. …

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