Fed Says Unemployment Could Mean a Drawn-Out Recovery
Thursday, July 16, 2009
A new forecast raised fresh doubts yesterday about how strong any economic recovery might be, as the Federal Reserve projected that the unemployment rate may surpass 10 percent by year's end and warned that the economy may not return to full health for at least five years.
The projections, by 17 top Fed leaders, suggest that a jobless recovery could be approaching -- one in which the economy begins growing again in the coming months but times remain tough for American workers. The Fed leaders forecast higher unemployment rates than they had just two months earlier. At the same time, they upped their expectations for economic growth.
The stock market rose yesterday on similar optimism about growth, recording a 3 percent gain, as measured by the Standard & Poor's 500-stock index. Industrial firms like General Electric and Caterpillar, in particular, climbed steeply on industrial production figures that were better than analysts expected.
Economists increasingly agree that the economy will begin growing again in coming months, but there is no consensus about what shape that expansion may take.
The Fed's forecasts suggest that the recovery, when it comes, is unlikely to have much immediate impact on the job market. Most of the Fed governors and regional bank presidents expect that the unemployment rate will be 10 percent or higher in the final quarter of the year, according to projections released along with minutes of a June policymaking meeting.
While economic growth and job creation often go hand in hand, that relationship has broken down in the aftermaths of the past two recessions. This could reflect efforts by companies to become more efficient as they emerge from hard times. But economists are not sure of the reason.
The Fed leaders also expect the economy to shrink less than previously expected in 2009 and to grow at a steady clip in 2010. But they anticipate that the economy will require an unusually long time to regain its vigor.
"Most participants indicated that they expected the economy to take five or six years to converge to a longer-run path characterized by a sustainable rate of output growth and rates of unemployment and inflation," the document said, "but several said full convergence would take longer."
For months, the economy has been declining more slowly than at the beginning of the year. But there has been little evidence of actual growth. That was reflected in a separate report yesterday that industrial production contracted in June for the eighth consecutive month, though at the slowest rate in that span.
"Eventually we're going to need to see some better numbers, as opposed to just less bad," said Robert A. Dye, a senior economist at PNC Financial Group.
That said, the Fed officials were disinclined at their late June policymaking meeting to take new steps to try to strengthen the economy. The central bank could have expanded its purchases of long-term government bonds and other assets to try to push down interest rates further, for example, but concluded that the effects would be uncertain, according to the minutes.
The minutes offered little detail about how or when the Fed might wind down its emergency programs to support the availability of credit in the economy and ease the effects of the financial crisis. Some traders and analysts have expected clearer guidance on the Fed's exit strategy. The absence of this information helped fuel confidence that the central bank would continue its current efforts to support economic activity.
"All the programs remain on the table," said Richard Yamarone, chief economist at Argus Research. "The battle is still being fought, and the economy is not out of recession."
Prices are rising, though. The Labor Department said yesterday that the consumer price index rose 0.7 percent last month, driven primarily by a 17 percent rise in the price of gasoline. Even excluding volatile food and energy costs, prices rose more than analysts expected, by 0.2 percent.
The data offer the most solid evidence yet that the nation has avoided the onset of deflation, a dangerous process in which the weak economy causes prices to fall, leading people to further rein in spending and setting off a vicious downward cycle. Instead, prices for a wide range of goods -- clothing, medical care, even automobiles -- increased in June.
Another report, meanwhile, supported the prevailing view among economists that an expansion will begin soon. Industrial production fell 0.4 percent in June, less than analysts had forecast and the most modest decline since October. Many analysts argue that the industrial sector has now contracted so much -- it is producing at only 68 percent of its capacity, the lowest on record -- that it will soon have to turn positive to keep up even with tepid demand. In particular, the reopening of Chrysler and General Motors assembly lines in coming weeks will provide a boost, even though they will operate at much lower levels than a year ago.
In another piece of evidence that the factory sector is stabilizing, an index of manufacturing activity in the New York region came in at negative 0.6 percent, the strongest since April 2008, up from negative 9.4 in June. An index of zero in the Federal Reserve Bank of New York survey represents the line between contraction and expansion.
"The bottom line is that the economy is still very weak and very fragile," said Bill Hampel, chief economist of the Credit Union National Association. "We're talking about a recovery beginning in the third or fourth quarter, but that's just barely a recovery."