After a shaky 2013, the market entered the new year divided over the American economy. Every year, the Federal Reserve Bank of Philadelphia surveys 42 professional forecasters on their predictions of key economic indicators for the upcoming year. This closely watched survey reflects leading academics’ sentiments on the economy. Some were cautiously optimistic, arguing that a real upturn had begun while others remained pessimistic, warning about the potential for global events to disrupt the American recovery. Now, at the end of 2014, the Financier looks back to see how this key set of predictions compared to what actually happened.
The Financier chose to focus in on five key indicators: Real gross domestic product (GDP), unemployment rate, nonfarm payrolls, and headline and core Personal Consumption Expenditures (PCE) to take a look at how the predictions panned out. Collectively, these five indicators gauge American economic output, employment strength, and inflation, and paint a picture of a sharp but shaky recovery.
The real GDP measures economic output of the United States adjusted for inflation. Forecaster’s predictions of the percent change in real GDP failed to match up with the actual increases, although, in light of the negative growth in the first quarter, the prediction of an especially strong second quarter turned out to be essentially correct.
The unemployment rate indicates what percent of the job-seeking population is unable to find a job. After essentially hitting right on target for the first quarter, the forecasters slightly overestimated the unemployment rate for the rest of the year, with the American economy adding more jobs than expected.
The nonfarm payrolls indicator reveals the number of jobs added in all non-farming industries, and is widely utilized as a key measure of hiring strength. Reflecting the similar overestimate of unemployment rate, the forecasters underestimated the number of jobs added for all three quarters.
Headline and Core PCE (Adjustment: Seasonally Adjusted Annual Rate)
The headline PCE uses changes in spending level of American households (a component of the GDP) to assess inflation, with the assumption that households would buy, on average, the same goods every time period. The actual changes in headline PCE proved to be much more volatile than forecast.
The core PCE is formed the same way as the headline PCE, but simply removes energy and food expenses. Again, the actual changes in core PCE proved much more volatile than the steady, gradual increases forecast. The second quarter jump in both expenditures came from unexpectedly strong consumer spending in the second quarter, but overall all figures remained below the Federal Reserve’s annual inflationary target of two percent.