Aspen Publishers

Blue ChipFinancial Forecasts

Top Analysts’ Forecasts Of U.S. And Foreign Interest Rates, Currency ValuesAnd The Factors That Influence ThemVol. 28, No. 10, October 1, 2009Wolters Kluwer

Law & Business

BLUE CHIPFINANCIALFORECASTS

EXECUTIVE EDITOR:RANDELL E. MOORE

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TABLE OF CONTENTS

Domestic Commentary p. 1Domestic Summary Table

–Table of consensus forecasts of U.S. interest rates and key economic assumptions

p. 2

International Summary Table

– Table of consensus forecasts of international interest rates and foreign exchange values

p. 3

International Commentary

p. 3

Individual Panel Member’s U.S. Forecasts

– Of interest rates andkey assumptions for the next six quarters

p. 4-9

Individual Panel Member’s International Forecasts

– Of international interest rates and foreign exchange values

p. 10-11

Viewpoints

– A sampling of views on the economy and governmentpolicy excerpted from recent reports issued by our panel members

p. 12-13

Special Questions

– Results of special questions posed to panelmembers about the economy, financial markets and government policy

p. 14

Databank

– Monthly historical data on many key indicators of economic activity

p. 15

Calendar

– Release dates for important upcoming economicData, FOMC meetings, etc.

p. 16

List Of Contributing Economists

– To Domestic and InternationalSurvey

inside of back cover

Consensus Still Sees Trend-Like Real GDP Growth Over Coming Year

Domestic Commentary

Confidence remains high that the U.S.economy began growing again this summer, ending the longest,deepest recession in the post World War II era. Indeed, more than90% of our panelists say the recession has ended. Moreover, consen-sus forecasts of near-term economic growth again moved higher overthe past month, extending the streak of upgrades that began in April.Nonetheless, the consensus continues to only foresee trend-like realGDP growth of 2 ¾% or so over the coming year, well short of theebounds that followed prior recessions in the past 60 years.r Among the data released since our last survey that helped lift expec-tations of near-term GDP growth was a four-point jump in the Insti-tute of Supply Management’s August index of manufacturing activityto 52.9, matching its highest reading since July 2006. Other Augustreports also exceeded expectations, including a 2.7% surge in retailsales, a 0.8% jump in industrial production and a 1.5% increase inhousing starts that left them at their highest level in nine months.Moreover, the Conference Board’s index of leading economic indica-tors rose for a fifth consecutive month in August and is up 4.7% overhe past five months, the strongest such gain since early 1983.t The news, however, was not uniformly upbeat. The unemploymentrate jumped 0.3 of a percentage point to 9.7% in August. The tradedeficit widened by a much larger than expected $4.5 billion in July.Sales of new single-family homes rose a smaller-than-expected 0.7%in August while sales of existing homes actually fell 2.7%, accompa-nied by a second-consecutive drop in the median sales price. Neworders for durable goods unexpectedly declined by 2.4% in Augustand nondefense capital goods shipments excluding aircraft dropped1.9% to a fresh cycle low. Early indications suggest unit sales of carsand light trucks fell dramatically in September following the “cashor clunker” induced increases in July and August.f Key factors expected to cap the strength of the economic recoveryover the next six quarters include: an unusually slow improvement inlabor market conditions; only modest gains in consumer spending,restrained by tepid growth in personal income, tight credit and a de-sire by households to pare debt; an atypically muted recovery in resi-dential investment due to still rising home foreclosures and persis-tently high inventories of unsold existing homes; a sharp further pull-back in commercial construction; and limited improvement in capitalspending resulting from the excess capacity that exists in many sec-ors and still-tight credit for small and mid-size businesses.t As for the specifics of our September 23

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survey results, theconsensus predicts real GDP expanded at an annual rate of 3.2% inQ3 and will grow at a 2.5% clip in the final quarter of this year andin Q1 2010. The Q3 forecast increased 0.9 of a percentage point overthe past month, the Q4 2009 and Q1 2010 estimates rose 0.2 of apercentage point and 0.1 of a point, respectively. Consensus forecastsof real GDP growth in subsequent quarters were little changed thismonth. Real GDP is predicted to expand at a 2.7% rate in Q2 2010,0.1 of a point less than predicted last month. Real GDP is forecast togrow at a 2.8% rate in both Q3 and Q4 of next year, the Q3 projec-tion 0.1 of a point better than predicted last month. Our panelists’first stab at predicting real GDP’s growth rate in Q1 2011 produced aonsensus forecast of 2.9%.c Given the subdued pace of recovery, inflationary pressures are ex-pected to remain relatively muted over the next year, according to theconsensus. Since December 2008 and March 2009, respectively, theProducer Price Index (PPI) and the Consumer Price Index (CPI) havecontracted on a year-over-year basis, primarily the result of the steeprun-up and subsequent pull-back in energy and food prices. In July,the 12-month decline in the PPI widened to -6.8% while the declinein the CPI reached -2.1%. In August, however, the y/y change in thePPI narrowed to -4.3% while the change in the CPI shrank to 1.5%.By late this year or early next, the y/y change in both measures of inflation is widely expected to become positive again, but largelybecause of less favorable year ago comparisons. On the other hand,the y/y change in inflation excluding food and energy prices iswidely expected to continue working its way lower for the time be-ing. For example, the core CPI was up 1.9% y/y in April but hasdeclined each and every month since to stand at 1.4% in August.While the overall CPI likely rose at a seasonally-adjusted annual rateof 2.7% in the current quarter, the consensus continues to foreseerowth rates of 2.0% or less between Q4 2009 and Q4 2010.g In light of uncertainty about the strength of the recovery and theexpectation that inflation will remain subdued, the consensus contin-ues to believe the Federal Reserve will move very cautiously in un-winding its monetary accommodation. The policy statement issued atthe conclusion of the Federal Open Market Committee’s September22

-23

meeting did nothing to dissuade panelists of that belief.Policymakers’ discussion of the economic outlook was a bit moreoptimistic, noting signs of a pick-up in economic activity and thatlong-term inflation expectations remain tame. The committee alsoreiterated its commitment to leave the target federal funds rate un-hanged “for an extended period”.c The most notable news from the meeting, word that the Fed wouldpurchase a "total" of $1.25 trillion of agency-issued mortgage-backedsecurities (MBS). Earlier statements said the Fed would buy "up to"$1.25 trillion. However, the FOMC retained the "up to" phrasing forits planned purchases of $200 billion of agency debt. The FOMC alsoannounced it would slow the rate of buying for both programs andextend the purchases through the first quarter of next year. The dayfollowing conclusion of the FOMC meeting the Fed announced itwould reduce the size of upcoming Term Auction Facility (TAF) andTerm Securities Lending Facility (TSLF) operations in light of im-proving market conditions. Neither represent a tightening of policybut rather administrative moves designed to align the size of lendingacilities with underlying demand.f Given the unanimous vote at the FOMC meeting, credit markets weretaken aback by Fed Governor Kevin Warsh’s hawkish op-ed in theSeptember 25

Wall Street Journal.

In it, Warsh said “prudent risk management indicates that policy likely will need to beginnormalization before it is obvious that it is necessary, possibly withgreater force than is customary”. Warsh added that “If "whatever ittakes" was appropriate to arrest the panic, the refrain might turn outto be equally necessary at a stage during the recovery to ensure theFederal Reserve's institutional credibility.” Short-term rates jumpedand long-term yields swooned in reaction to the op-ed. However, inthe Q&A after a speech later that day, Warsh said his hawkish tone int he op-ed did not imply an imminent change in Fed policy.

Consensus Forecast

The consensus still predicts the FOMC willleave its target federal funds rate at 0.0%-0.25% until late nextspring. By the end of 2010, the consensus thinks the FOMC will haveraised its target rate by about 100 basis points. In the interim, the Fedis expected to continue unwinding its various lending facilities andpurchase programs. The Treasury yield curve is expected to flattenover the coming year as short-term market rates increase faster thanlong-term yields. The consensus assumes the dramatic narrowing incorporate spreads seen over the past several months may struggle toontinue

(see page 2 for U.S. consensus forecasts).

Special Questions

About 70% of the panelists think that by the endof this year Congress will extend, expand or both the $8,000 federaltax credit program for first-time homebuyers. However, just 42%believe Congress should do so. About 60% of the panelists say thetrade deficit will widen in the second half of this year; almost three-quarters think it will widen in 2010