Significant downward revisions to expected growth reveal large implied negative and widening output gaps, even as forecast long-term yields rise, according to Professional Forecaster Survey (Posted 8/12).
While the release has been out for nearly a few weeks, it happened after an early Q2 release. Tracking shows a slight upward revision to -0.3% from the previous value of -0.9%, and it is unclear whether respondents’ views will change significantly. This is a picture of GDP.
figure 1: Reported GDP (bold black), CBO potential GDP (grey), CBO May 2022 forecast (blue), SPF February median forecast (red), SPF May forecast (light blue), and SPF August forecast (pink), all in billions Ch.2012$, SAAR, logarithmic scale. Source: BEA Advance 2022Q2, Congressional Budget Office (May 2022), Philadelphia Fed Survey of Professional Forecasters (Different kinds).
Using the CBO’s May estimate of potential, the output gap was -2.1% in the second quarter, rising to an implied -2.8% in the third quarter of 2023. Taking this potential estimate literally, one should expect significant downward pressure on prices. Furthermore, the -2.1% gap in Q1 2022 suggests that cost-push shocks (and any expected inflation in the system) are driving inflation, not demand. Of course, potential GDP is notoriously difficult to estimate, so one must be wary of drawing strong conclusions.
In terms of long-term yield expectations, those expectations have been rising over the past three quarters.
figure 2: Reported 10-year Treasury yield (bold black), CBO May 2022 forecast (blue), SPF February median forecast (red), SPF May forecast (light blue) and SPF August forecast (pink) color), all expressed as a percentage. The observation period for the third quarter of 2022 is August 23. Source: BEA Advance 2022Q2, Congressional Budget Office (May 2022), Philadelphia Fed Survey of Professional Forecasters (various versions).
Note that there is a sharp upward trend from February to May. There will undoubtedly be some changes after the Jackson Hole speech, but probably not enough to change the substance of the forecast for long-term yields.
