Business Economists Have Higher Inflation Expectations

The National Association for Business Economics released its latest survey of 43 professional forecasters. The respondents expect inflation to remain a “concern” throughout 2024.

The May forecast calls for inflation to remain elevated at 2.6%, half a percentage point higher than the forecast in the February 2024 survey, said NABE President Ellen Zentner, who is also Morgan Stanley’s chief U.S. economist, in prepared remarks. “With the higher inflation expectations, panelists now anticipate the Federal Reserve’s Open Market Committee will cut rates by half a percentage point — down from three-quarters of a point and to occur later in the year than previously expected.”

That would translate into two 25-basis point cuts. The measure of inflation in discussion is Personal Consumption Expenditures (PCE), the benchmark that the Fed pays more attention to than the Consumer Price Index. “The yield on 10-year Treasury notes at the end of 2024 is forecasted to be 4.2%, up from 3.8% in the February outlook,” Zentner added.

However, there is more uncertainty among the group as a whole. Individual forecasts were more dispersed, so less common agreement on what seems likely.

The respondents forecast that agverage employment gains would slow through 2024 until it sunk to 125,000 jobs a month in the final quarter of the year. “Panelists still anticipate stronger economic growth in 2024 than in previous NABE Outlook surveys, and 90% of them expect a soft landing in 2024,” said NABE Outlook Survey Chair Mervin Jebaraj, who is also director of the Center for Business and Economic Research at the University of Arkansas. “Economic growth projections are more pessimistic than the Federal Reserve’s economic projections published in March which forecasted weaker economic growth and higher headline inflation in 2024.” The forecasts expected unemployment to rise to 4.0% in the third quarter of the year and peak at 4.1% in 2025 Q1.

The median 2024 real GDP forecast in February was 2.2%; now it is 2.4%. “The median forecast for the change in real GDP from the fourth quarter (Q4) of 2023 to Q4 2024 is 1.7%, up from the 1.5% forecasted in the February,” the 2024 survey said. Forecasts for the second and third quarter were respectively revised higher from 1.4% and 1.3% to 2.0% and 1.5%.

An important question is what the neutral interest rate, which preserves growth and jobs, might be. Getting the number wrong can mean monetary policy that doesn’t match the current conditions, undermining strategy. Almost a third of the panelists, 32%, project it is between 2.50% and 2.74%, while 20% say it’s in the range of 2.75% to 2.99%. Another 20% think it is between 3.00% and 3.24%, while 15% estimate it is 3.25% or greater, and 15% estimate it is less than 2.50%.