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Fed sees high jobless rate for years to come

November 24, 2009|By Neil Irwin

WASHINGTON -- Top Federal Reserve officials expect unemployment to remain elevated for years to come, according to new projections released Tuesday, suggesting that the economic recovery will be too gradual to create rapid improvement in the job market.

The unemployment rate will be in the 6.8 to 7.5 percent range at the end of 2012, according to forecasts of 17 top Fed officials, down from its 10.2 percent rate in October but still far above the 5 percent or so level typically seen in a healthy economy. Most of the Fed leaders "anticipated that about five or six years would be needed for the economy to converge fully to a longer run path" with sustainable growth and thriving labor market.

Indeed, a separate report Tuesday said that the economy grew more slowly than first thought this summer -- a 2.8 percent annual rate of gross domestic product growth in the third quarter, not the 3.5 percent first estimated. That suggests that the recovery started with less of a bang than originally reported. There was some good news on the economic data front, however, as new reports showed that home prices climbed in September and consumer confidence ticked up in November.

The Federal Reserve forecasts came along with minutes from the meeting earlier this month of the central bank's policymaking committee, at which it left interest rates unchanged near zero and sent the signal that it would leave them at that very low level for an "extended period." The document conveys some of the Fed's thinking as to why: Despite the incipient recovery, policymakers think the weak job market recovery could hang over the economy for some time.

Weakness in the labor market "remained an important concern to meeting participants," the minutes said, as "business contacts reported that they would be cautious in their hiring and would continue to aggressively seek cost savings," and there were signs that businesses "would be able to meet any increases in demand in the near term by raising their employees' hours and boosting productivity," rather than doing new hiring.

The minutes even raised the prospect that this could be a jobless recovery, with slow hiring for some time, as was the case during the last two recessions. The Fed leaders "discussed" that possibility.

But they did upgrade slightly their projections for the economy in 2010 and 2011. They now forecast that the unemployment rate will be in the 9.3 to 9.7 percent range at the end of 2010, compared with a 9.5 to 9.8 percent range in their previous forecasts from June. They expect GDP to grow 2.5 to 3.5 percent next year, compared with a 2.1 to 3.3 percent projection in June.

The officials also discussed -- and apparently dismissed -- the risk that their ultra low interest rate policy is stoking bubbles in the stock market and other assets. "While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks," the minutes said.

The Fed minutes weren't the only report Tuesday to serve as a reminder of the softness of the recovery so far. GDP, a broad measure of economic output, rose at a 2.8 percent annual rate in the July-to-September period, the Commerce Department said, compared with the 3.5 percent growth rate first reported. The agency re-calculates the data as more complete information becomes available.

The revised data are still consistent with the widespread view among economists that the recession ended over the summer, as the nation began producing more goods and services. But they also indicate that the burst of activity wasn't as great as first thought, which helps explain why the job market has been so painfully slow to turn around.

Economists believe the economy has continued growing in the fourth quarter, though still at a measured pace -- an annual rate in the 3 percent range. Employment frequently lags behind overall output at the end of a recession, as skittish employers ramp up production using existing workers rather than hiring new ones, unsure whether rising demand will last.

The Commerce report showed that personal consumption expenditures rose at a 2.9 percent rate in the third quarter, not the 3.4 percent growth originally reported, with a particularly steep reduction in the growth in purchases of durable goods, such as automobiles.

Consumer spending accounts for about two-thirds of total GDP, making its sustained recovery a key to continued expansion.

Irwin writes for the Washington Post.

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