The GDP trajectory is falling, inflation expectations are rising, and long-term interest rates are expected to rise.
figure 1: GDP (black), February Professional Forecaster Survey Average GDP (blue), May (red), CBO Potential GDP (grey). The NBER uses shades of grey to define the peak and trough dates of the recession. Sources: BEA, SPF (various issues), CBO (July 2021) and NBER.
Interestingly, if one is to believe the CBO’s July potential estimates (new on May 25th), we’re far from full employment, and given the May survey, it’s unlikely to be any closer.
With inflation rising, near-term inflation forecasts have risen – but continue to trend lower. The May survey put the rate at 3% in the second quarter of 2023, up from 2.5% in the first quarter of 2023 survey in February
figure 2: Quarter-on-quarter annualized CPI inflation (black), November 2021 Professional Forecaster Average Inflation Survey (yellow-green), February 2022 (blue), May (red), CBO potential GDP (grey). The NBER uses shades of grey to define the peak and trough dates of the recession. Sources: BLS, SPF (various issues) and NBER.
Higher inflation and persistent (negative) output gaps suggest that demand-pull is not the only reason for accelerating inflation. Of course, estimates of potential may be too high, in which case demand pull is one explanation. But if the potential is as indicated above, then inflation is at least partly cost-driven.
Long-term (10-year) Treasury yields are now expected to move sharply higher, reflecting the rise in real interest rates since the February survey.
image 3: Ten-year Treasury yields (black), November 2021 Survey of Average Inflation of Professional Forecasters (yellow-green), February 2022 (blue), May (red). 2022Q2 real yield to 5/13. The NBER uses shades of grey to define the peak and trough dates of the recession. Sources: Treasury, SPF (various issues) and NBER.
