Top forecasters bumped up their outlook for U.S. economic growth in the first quarter and the whole of 2005, but inflation expectations were unchanged, a survey released Thursday showed.
Nearly 70 percent of the economists surveyed in the Blue Chip Economic Indicators newsletter raised their projections for gross domestic product growth in 2005, taking the consensus to 3.7 percent from 3.6 percent forecast in February.
While that represents a sharp slowdown from 4.4 percent expansion in 2004, the forecast for first-quarter growth was also increased, to a 3.7 percent annual rate from 3.5 percent predicted last month.
Blue Chip surveyed 54 professional forecasters on March 2-3 for the newsletter.
“Increased optimism about the pace of business investment, corporate profits and residential construction were the primary contributors to the upward revision in this month’s forecast of GDP growth in 2005,” the newsletter said.
Somewhat inexplicably, the forecasters said expectations for inflation were unchanged despite larger-than-expected increases in some January data and sharp gains in crude oil and gasoline prices over the past several weeks.
The consensus was for 2.5 percent growth in the consumer price index this year, down from a 2.7 percent increase in 2004.
Forecasters continued to predict the Federal Reserve would keep raising rates over the course of the year, taking the federal funds rate up by another 100 to 125 basis points to between 3.5 percent and 3.75 percent by the end of 2005.
Fed policy-makers have raised borrowing costs six times since last June to take official overnight rates to 2.5 percent, and have said they believe they can continue to tighten policy at a pace that is likely to be measured.
“The Consensus forecast for short-term interest rates is consistent with five more quarter-point rate hikes this year, raising the target federal funds rate to 3.75 percent by the end of this year, and two more quarter-point rate hikes in 2006, raising the funds rate target to 4.25 percent by May 2006,” Blue Chip said in a supplemental quarterly report.
The newsletter said continued strength in business investment bolsters the case for renewed strength in factory activity, while real disposable incomes were forecast to rise 3.4 percent -- just below the 3.5 percent gain in 2004.
The panel forecast consumer spending to rise 3.4 percent in 2005, slowing from a 3.8 percent rise last year and slightly lower than February’s 3.5 percent forecast. The growth will come from annual rates of 3.0 percent in the first quarter, 3.2 percent in the second and third, and 3.1 percent in the final three months of the year.
Non-residential fixed investment in structures, equipment and software was predicted to notch 9.9 percent growth this year, 1.1 percentage points better than was estimated a month ago and just 0.7 point less than in 2004, Blue Chip said.
It said the unemployment rate should decline to 5.1 percent by the fourth quarter.
