Economy limping back to strength

By Neil Irwin and Renae Merle
Washington Post Staff Writer
Wednesday, November 25, 2009

The unemployment rate will remain elevated for years to come, according to a forecast released Tuesday by the Federal Reserve that addresses for the first time economic conditions at the time of the next presidential election.

It paints a grim picture. Top Fed officials expect the unemployment rate to remain in the 6.8 to 7.5 percent range at the end of 2012 and said it could take "about five or six years" from now for economic activity to return to normal. The jobless rate was 10.2 percent in October.

That sober forecast came on top of a revised government estimate also released Tuesday of economic output in the third quarter showing that the recovery got off to a slower start over the summer than previously thought.

Government efforts to prop up the economy -- including the $787 billion stimulus package passed in February, the "Cash for Clunkers" program to support auto sales this summer, and a zero interest rate policy by the Federal Reserve -- are helping. The contribution of government spending to gross domestic product in the third quarter was actually higher than originally reported, the Commerce Department said.

But so far, the impact of these efforts has not been enough to engender a strong rebound.

"It is a slow-motion recovery," said Stuart Hoffman, chief economist at PNC Financial Services Group. "It sure doesn't look like the beginning of a normal, rapid recovery."

The math is simple: The U.S. economy is capable of growing at roughly 2.5 to 3 percent a year, thanks to population growth and technological improvement, and needs to grow faster than that to create large numbers of jobs and significantly improved standards of living.

Following the last recession of comparable depth for example, in 1981-82, gross domestic product growth averaged a 7.8 percent annual rate for four quarters.

In this recession, by contrast, the five current Fed governors and 12 presidents of regional Fed banks expect growth of 2.5 to 3.5 percent in 2010 -- which would be enough to bring the unemployment rate down only slightly.

"Business contacts reported that they would be cautious in their hiring and would continue to aggressively seek cost savings," said minutes of the Fed policymaking meeting earlier this month, which were released alongside the forecast. The officials "expected that businesses would be able to meet any increases in demand in the near term by raising their employees' hours and boosting productivity, thus delaying the need to add to their payrolls."

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 past two recessions. The Fed leaders "discussed" that possibility. But they were slightly more optimistic than before, upgrading their projections for the economic growth and employment in 2010 and 2011 from the levels envisioned in June.

The officials also discussed -- and apparently dismissed -- the risk that their ultra-low interest rate policy is stoking bubbles in the markets, artificially inflating the value of stocks, gold 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.

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