Our best guess at the Boston Fed is that 2007 will bring continued moderate growth, with GDP at or a bit below potential, unemployment likely remaining below 5 percent, and core inflation gradually declining.

The outlook for real growth in 2007, then, is for continued strength in consumer spending and business investment to be partially offset, particularly early next year, by the drag from the housing market.  Growth will start the year on the low side, but should be back to about 3 percent by the end of next year.  So my best guess right now is that real GDP growth will average between 2 ½ and 2 ¾ percent in 2007. 

[I]n the second quarter of this year real GDP only grew at a 2.6 percent rate. In the third quarter, growth dropped to a 2.2 percent rate, and growth is likely to be about the same, or perhaps a bit higher in the current quarter.

This is all just a long-winded way of saying that it is difficult to say with true precision just how the economy will close out this year in terms of growth and pace. My guess is that we are most likely going to finish the year at a pace that exceeds the gloomy forecasts making all the headlines lately. If you net the downdrafts from the housing and auto sectors against the tailwinds from other countries that are growing faster than the United States, then adjust for the updrafts of a dynamic service sector and thank your lucky stars for a warm start to winter and burgeoning oil and gas inventories that have softened energy prices, I wouldn’t be surprised if the economy proves to have grown at better than two percent, net of inflation, in the second half of this year, then picks up pace in 2007. This is not a forecast, mind you. There are risks out there that, should they come to pass, would result in slower growth. Barring any unforeseen circumstances, however, I think this is a reasonable expectation. At least, that’s how I see it from my perch at the Dallas Fed.

In fact, I think we’re seeing the economy evolve very much along the lines that we discussed at the past couple of meetings...I think there’s a smidgen more weakness on the real side, but it doesn’t alter my basic view that the economy is evolving along the lines of having slightly below potential GDP growth. I don’t see any indications that we will have big spillovers into other sectors from weak housing and motor vehicles. In that sense, there’s a slight concern about a little weakness, but the right word is I guess a “smidgen,” not a whole lot.

"We would expect some monthly ups and downs, but when you look at the broad trend in the economy, there's a lot of strength there."

"Overall, I still think the economy is solid." 

Moskow said that the Chicago Fed is expecting gross domestic product growth to be "somewhat below trend," citing a forecast for 2007 of a 2.8% expansion.  "I don't think that the data we have seen are out of line with that forecast," he added.

From a CNBC interview.

Now, currently, we don't see the slowing in housing markets spilling over into a more prolonged period of weakness in the U.S. economy overall. On balance, the 95 percent of the economy outside of housing remains on good footing. Employment has been increasing near its long run sustainable path. Productivity trends remain solid. Recent declines in oil prices should give household budgets a boost. Economic growth in other countries should increase demand for our exports. And current financial conditions are not very restrictive by historical norms.

     So, my baseline forecast is that GDP growth will pick up from the weak third quarter and average somewhat below its potential growth rate over the next year or so. Of course, that's an average. And I expect to see some volatility in those numbers.

...

Our estimate is for '07..., as I mentioned, growth would be slightly below potential, but it should be coming back to potential as we exit '07 and go into '08.

"It's very dangerous to focus in on one number,'' Plosser told reporters during a conference hosted by the Philadelphia Fed on economic growth and development today. ``You have to focus on context and not allow yourself to get hung up on one particular number.''

 As reported by Bloomberg News

As slack in the economy is reduced, however, economic growth tends to moderate. Indeed, at that stage, some slowing of growth to a pace consistent with the rate of increase in the nation's underlying productive capacity is necessary if the expansion is to be sustained without a buildup in inflationary pressures. In my testimony to the Congress in July, as part of the Federal Reserve's semiannual monetary policy report, I noted that the U.S. economy had entered this transition phase, and that some moderation of economic growth over the remainder of the year seemed likely.

The deceleration in economic activity currently under way appears to be taking place roughly along the lines envisioned in the Federal Reserve's July report. As anticipated, the slowdown primarily reflects a cooling of the housing market. Most other sectors of the economy appear still to be expanding at a solid rate, and the labor market has tightened further.

Over the next year or so, the economy appears likely to expand at a moderate rate, close to or modestly below the economy's long-run sustainable pace. Core inflation is expected to slow gradually from its recent level, reflecting the reduced impetus from high prices of energy and other commodities, contained inflation expectations, and perhaps further reductions in the rate of increase of shelter costs and some easing in the pressures on capital and labor resources. However, substantial uncertainties surround this baseline forecast.

Up until July, most economists would have said that the rate was somewhere close to 3.5 percent... [However], the commonsense estimate of trend growth has now been lowered slightly. My own view is that trend growth is closer to 3 percent than 3.5 percent. Some even claim that trend growth is as low as 2.8 percent. I don’t think it is useful to quibble over two-tenths of a percentage point, since our ability to measure productivity is so fraught with problems. Nevertheless, almost everyone agrees that estimates of trend growth are now lower.

While I am fairly optimistic that the fundamentals remain sound for continued economic expansion, I am not as sanguine about the prospects for inflation.

...So we need to remain vigilant and recognize that maintaining the current stance of policy, or even firming further, may be in the best interests of the economy’s long-run performance.

"I'm comfortable presently with where we are."

...

Fisher said that inflation is "stickier" when slowing down than when it's acclerating and that "one month does not make a trend."

As reported by Bloomberg News

"One month doesn't make a trend,'' Moskow told reporters after a speech to American Business Media in Chicago. ``{The CPI} is moving in the right direction. The key is whether that can be sustained and how quickly we can move to rates that are within the range that is commensurate with price stability. We are certainly not there now.''

"We live in a country with enormous economic production."  Fisher said at the Texas Lyceum Public Conference in San Antonio.  ``We produce over $13 trillion a year in output.  We have 300 million mouths to feed, 140 million workers, and we are growing forcefully.''

As reported by Bloomberg News