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Fed lowers economic expectations for 2011

From foreclosure to food shortages, the economic downturn set in motion by the financial crisis of 2008 is having a broad and deeply-felt global impact.

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Washington Post Staff Writer
Wednesday, November 24, 2010; 12:40 AM

Unemployment is set to remain higher for longer than previously thought, according to new projections from the Federal Reserve that would mean more than 10 million Americans remain jobless through the 2012 elections - even as a separate report shows corporate profits reaching their highest levels ever.

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Top Federal Reserve officials project that the unemployment rate, now 9.6 percent, will fall only to about 9 percent at the end of 2011 and about 8 percent when the next presidential election arrives, in late 2012. The central bankers had envisioned a more rapid decline in joblessness in their previous forecasts, prepared in June.

The sober economic forecast comes despite signs that the recovery is picking up slightly. The Commerce Department said Tuesday that gross domestic product rose at a 2.5 percent annual rate in the three months ending in September, not 2 percent as earlier estimated. And there have been solid readings in recent weeks on job creation, manufacturing and retail.

The apparent contradiction reflects the brutal math that faces a nation trying claw out of a deep recession: Moderate growth, which would be fine in normal times, will do little to bring down sky-high joblessness, a reality reflected in the Fed's forecasts.

Even as conditions are likely to remain miserable for job seekers for years to come, an extraordinary bounce-back is underway in the nation's corporate sector, with profits rebounding 28 percent over the past year to an all-time high in the third quarter.

Businesses' spending on compensation for employees, by contrast, rose only 7.6 percent.

Among the reasons for the strong earnings growth were that financial companies are no longer suffering from massive write-downs on bad investments as they were in 2008 and profits from U.S. firms doing business overseas have shot up.

The economic recovery, which had earlier been driven in large part by government stimulus spending, is now increasingly fueled by demand from consumers and businesses. That shift had been in doubt as recently as the summer, when growth had noticeably slowed.

The Fed's top policymakers project that gross domestic product will rise 3 to 3.6 percent next year - which would represent a solid acceleration from the past two quarters but still would only be enough to bring the unemployment rate to the 8.9 to 9.1 percent range in the final months of 2011 and 7.7 to 8.2 percent at the end of 2012.

The officials also increased their estimate of how low the nation's unemployment rate could ultimately go without stoking inflation. Several estimated that level is 6 percent or higher, not the 5 to 5.3 percent earlier thought.

The revised Fed forecast helped sink stocks on Wall Street, where investors were also concerned about Europe's mounting debt crisis and rising tensions on the Korean peninsula. The Standard & Poor's 500-stock index, a broad gauge of U.S. markets, fell 1.4 percent to close at 1180.73.

"There are structural issues or residue from the financial crisis and the housing bubble restraining the economy," said Alan Levenson, chief economist at T. Rowe Price. "It's not even close to being a garden variety cyclical recovery."


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