More on the economic outlook for the coming year, from some folks who gave something to say about it.
From Thomas Hoenig, at the Kansas City Fed:
Most forecasts for economic growth in 2005 are in the range of 3½ to 4 percent, suggesting that the economy will continue to move forward, but at a slightly slower pace than the last two years... Personally, I expect economic growth to be closer to 4 percent than to 3½ percent, and I anticipate a continued strengthening of labor markets during the course of the year.
There is somewhat less consensus among forecasters about the inflation outlook. Some see a diminution of inflationary pressures due to the waning effects of energy prices and continued strong productivity holding down labor costs. Others are more concerned about a possible pickup in inflationary pressures — citing the upward pressure on import prices from dollar depreciation and recent indications that the exceptional productivity performance of the past decade may be slowing. Currently, I do not see any signs of a significant uptrend in inflation, but I recognize that inflationary pressures are more likely to emerge as the economy moves closer to full resource utilization in an environment in which monetary policy is still very accommodative.
From Janet Yellen, at the San Francisco Fed:
Let me turn to two factors that are not now, but have the potential to be, drags on the economy going forward. First is the very low personal saving rate, which has fallen over the past decade from about seven percent to under half a percent in the third quarter of this year. Part of the reason that consumers are saving so little out of disposable income is that interest rates are low. In addition, their wealth has been on the rise; in the latter half of the 1990s, rising stock prices had a lot to do with the increase in wealth, but more recently, the main impetus has been house price appreciation. With interest rates rising now and housing prices unlikely to continuing advancing at their recent robust pace, consumers may want to get their finances in order and curtail their spending in order to bring the saving rate up to more normal levels.
Fiscal policy is another factor that will come into play next year. The effects of the tax cuts and spending increases have been significantly positive for economic growth last year and this year. Next year, however, if current plans remain in place, the impetus from fiscal policy will wane. Most estimates suggest that fiscal policy could turn to being roughly neutral by 2005. This means that the main impetus to growth will have to come from private sector spending.
Let me next turn to the outlook for inflation. Over the last twelve months, inflation in the core CPI—that is, in the index excluding volatile food and energy prices--has come in at a moderate 2 percent. However, in the past couple of months, the readings have been a bit higher, most likely reflecting some pass-through of higher oil prices into core prices as well as increases in both commodity and import prices. This uptick in core CPI inflation bears close watching, but it’s not a big concern at this point for a few reasons. First, inflation figures can be a bit volatile from month to month, so two months of data aren’t enough to establish a trend. Second, another measure of core inflation—based on the personal consumption expenditures index—has been more modest. Third, as I mentioned earlier, supply-side effects should raise inflation only temporarily unless they become embedded in inflation expectations. And longer-run inflationary expectations seem to be well-anchored because the Fed’s strong commitment to maintaining price stability is well understood. Furthermore, slack still remains in the labor market and that slack is working to moderate the pace of wage and salary increases, putting continued downward pressure on inflation. So despite the uncertainties raised by oil prices, inflation—especially core consumer inflation—seems to be relatively well-contained at present.
There will certainly be more to come. I'll keep you posted.