The Fed Sees Recovery, and Higher Joblessness

Get ready for 10 percent unemployment. That's the message from the Fed.

Every quarter, the five members of the Federal Reserve Board and the presidents of the 12 regional Federal Reserve Banks give their best guesses about the economic outlook. The latest batch of numbers─released July 15─indicate that the Fed has become both more optimistic and more pessimistic. How could that be?

Well, reflecting the big jump in unemployment to 9.5 percent in June since their last forecast in April, most members of the Federal Open Market Committee (FOMC) now expect the jobless rate to reach 10 percent by the year-end. The "central tendency" of the forecasts, dropping the three lowest and the three highest predictions, is 9.8 percent to 10.1 percent. It would stay there for most of 2010; in the fourth quarter, unemployment would still range between 9.5 percent and 9.8 percent. All these projections are about 0.5 percentage points above the April forecasts.

And optimism? Interestingly, the economy's recovery is expected to be slightly stronger than in April. The decline in gross domestic product (GDP) is now expected to range between 1 percent and 1.5 percent in 2009, rather than the 1.3 percent to 2 percent expected in April. Likewise, the recovery in 2010 is expected to be slightly stronger, with economic growth of 2.1 percent to 3.3 percent, as opposed to the 2 percent to 3 percent in April. (All these figures reflect the "central tendencies" of the FOMC members.)

FOMC members cited a number of factors to explain their upgrade of GDP. Surplus business excess inventories seem to have dropped, so more production would be needed to meet demand; the decline in consumer spending seems to be abating; and housing may have hit bottom. But high unemployment and surplus production capacity would limit both consumer spending and new business investment.

The combination of higher growth and higher unemployment means "the Fed is implicitly raising its productivity assumptions," notes economist Ian Morris of HSBC. In other words, companies will do more with less.