Where will the economy be in five years?

As the fourth quarter begins, most economy-watchers have lost any hope that 2010 will be a year of strong growth. Instead, analysts now are expecting that it may be several years before output expands at a consistent pace that is vigorous enough to make a sizeable dent in unemployment rates. Economic forecasting is fraught with difficulties even one or two years ahead, so it is no surprise that there are varied perspectives on where the economy will be in the longer term, four or five years from now. This article compares longer term forecasts from three sources: Blue Chip Economic Indicators, the Office of Management and Budget and the Congressional Budget Office.

As the fourth quarter begins, most economy-watchers have lost any hope that 2010 will be a year of strong growth. Instead, analysts now are expecting that it may be several years before output expands at a consistent pace that is vigorous enough to make a sizeable dent in unemployment rates.

Economic forecasting is fraught with difficulties even one or two years ahead, so it is no surprise that there are varied perspectives on where the economy will be in the longer term, four or five years from now. The table below compares longer term forecasts from three sources.

One source is Blue Chip Economic Indicators, a leading newsletter that provides monthly consensus forecasts from 50 professional forecasters, largely representing private sector viewpoints. Figures in the table below were compiled by Executive Editor Randell Moore, and appear in the October issue. The Obama Administration forecasts are from the Office of Management and Budget. The Congressional Budget Office (CBO) forecasts are intended to support congressional decision-making.

Real economic growth (GDP)

The Obama Administration forecasts suggest that the economy will expand by more than 4 percent in 2012. Their GDP growth projection (4.2 percent) is one full percentage point greater for 2012 than the private Blue Chip consensus (3.2 percent).

The CBO forecast for 2012 (3.4 percent) is similar to the Blue Chip figure, but the CBO expects a surge in GDP in 2013 to real growth of 4.7 percent. Meanwhile, the Blue Chip forecasters expect GDP growth to actually slow down in 2013, to 3.0 percent growth. By 2015, five years from now, all three sources anticipate that real growth will have peaked and will be lower than in the previous year.

The Obama Administration projects that growth still will be above trend, at 3.6 percent, but the Blue Chip and CBO forecasts anticipate that the economy will be back to sluggish expansion, below 3.0 percent. The average of the three sources puts GDP growing at 3.0 percent, which is equal to the average annual real growth in GDP from 1987-2007, when the economy last peaked.

Inflation (CPI)

In spite of wide spread concern about the volume of bank reserves and liquidity in financial markets created by the expansive monetary policy of the Federal Reserve, none of the sources anticipate a significant spike in the inflation rate over the next five years.

As recently as 2008, the annual increase in the CPI was 3.8 percent. The greatest increase in prices anticipated is 2.3 percent by 2015, from the CBO forecast.

Unemployment rate

Unemployment rate forecasts are quite similar for 2012, with all three sources projecting that unemployment will continue above 8.0 percent. But, consistent with their expectation of strong GDP growth in 2013 and 2014, the CBO forecasts show unemployment rates dropping below 7.0 percent in 2013 and declining to 5.0 percent by 2015.

The Blue Chip panel of private forecasters is more pessimistic on unemployment. They envision a slower downward trajectory to a rate of 6.6 percent by 2015.

Five-year summary

The Obama Administration forecast is most bullish on real growth over time, projecting GDP rises above 4.0 percent by 2012 and is still above 3.5 percent five years from now. The CBO projects a spike in GDP growth in 2013, followed by a return to sluggish growth by 2015.

Unemployment is seen to come down year by year by all three sources, but only the CBO has the rate at 5.0 percent by 2015. Inflation remains slightly above 2.0 percent through 2015 in all the forecasts.

Short-term outlook

The W. P. Carey Round Number Forecast for GDP growth in 2010 and 2011 remains at 2.5 percent. Consumer spending is projected to grow by only 1.5 percent this year, just enough to prevent a double-dip recession, but not enough to boost the economy as in previous recovery periods.

Residential construction has been a disappointment for analysts, and is now certain to subtract from GDP growth yet again in 2010. Further, the strength of residential construction for 2011 is adjusted to a modest 5.0 percent growth pace. Business equipment and software spending is projected to continue to show double-digit growth into 2011, but at a pace reduced from the 15 percent increase expected in 2010.

Overall, the U.S. economy remains in slow-growth mode, afflicted by uncertainty and caution as businesses and consumers ride out the aftermath of the Great Recession.