Midyear Economic Forecast: Lower Inflation, Slow Growth

Bob Johnson: Today we want to review our midyear economic forecast, which frankly is little change from our prior estimates. The one category that's the biggest change and worth talking about is our inflation forecast. We had thought at the beginning of the year that core inflation might heat up to as much as 2.6%. It now looks like it may be more likely in the range of 1.8 to 2.0%.

Certainly falling cellphone service prices is a good part of that number--it takes off 0.2% all by itself--but certainly food price increases have also moderated more than we would have expected. Also from the auto sector, as a lot of cars come off lease, used car prices have frankly gone through the floor and that's had some spillover effect in pulling down a new car prices as well. Those factors have all ganged up, if you will, to keep inflation lower than what we had expected.

One fallout of that is that it does mean that maybe a wage earner will get a little further ahead by the end of the year than we had expected. Therefore, in our GDP forecast we had been saying 1.75 to 2% growth, and that's still the range we believe in. If you had asked us a few weeks ago, we would of said more likely the bottom end of that range. Now, with some of the data that we're seeing suggesting that inflation's going to fall and wage increases remain relatively higher, that maybe the consumer will do a little bit better than we expected. Now we're going to say GDP is more likely to grow at the 2% end of that range for the full year of 2017.

By the way, just to--we haven't established before, but we think 1.75 to 2.0 is also a pretty good forecast for 2018 as well.

Looking at some of the other items, we had been thinking job growth might be 190,000 per month on average for the full year. Just from what we've had so far, and frankly a lack of supply, we're now using more like 180,000 workers per month for the full year on average will be added to the workforce. A little bit lower there, but it's not necessarily bad for employees. It's just there aren't enough workers to go around, so to speak. That will also bring down the unemployment rate to somewhere in the 4 and 4.5% range, which is a little bit wider than we'd previously given. If I had to pick a single point about 4.2%, which is below of what we all believe is really full employment, so certainly that's relatively good news, especially for workers, maybe not so much for businesses.

Those are the key factors that we really hit in looking at our forecast. Just reminder, a couple of other things that haven't changed much--home price inflation, we expect to be at about 6%, and that home price increase will now not only be the west coast, but also across the whole U.S. We're seeing a pretty broad increase in prices. They've all kind of converged a bit. We had been using a much broader range, and a narrower set of cities, now we're thinking that the price increase is in homes will be at 6% and be widely distributed across the country providing some other benefits to consumers as well. Certainly something else that we believe is very important number.

That's how I would view 2017 going forward. It's still a year of relatively slow growth, below average growth, inflation that's higher than it's been, but still relatively moderate, and employment growth that's very moderate, but on the other hand, it's a good thing it's not any better because there just aren't enough workers to go around.