The Federal Reserve has delivered a rather bleak forecast for the U.S. economy, not just in the short-term, but in the medium-term as well. The Fed is predicting that the unemployment rate will be in just below 10 percent at this time next year and in the 6.8 to 7.5 percent range at the end of 2012. In other words, while we may not see a jobless recovery, the Fed thinks we’ll experience a slow motion one.
This scenario seems to be based primarily on the fact that the economy is growing much more slowly than it normally does in the early stages of a recovery. Although initial reports stated that the economy grew by 3.5 percent in the third quarter, that number has been revised downward to 2.8 percent. At the early stage of a robust recovery, economists expect to see 4 to 5 percent growth. Following the last recession comparable to the most recent one – the recession of 1982 – the recovery saw growth rates of almost 8 percent.
It’s not clear why this recovery has, to date, been so unimpressive. However, one obvious problem is that banks aren’t lending money. In the third quarter, lending decreased by 2.8 percent, the largest decline since at least 1984, according to the Washington Post, and the fifth consecutive quarter in which banks have leant less. In response, the head of the FDIC called on the government to spur lending by helping banks sell troubled loans, so as to free up money for new lending. The Obama administration has resisted this approach.
Frankly, I don’t believe that even the best economists can reliably forecast growth and unemployment rates for 2012. However, the forecasts for 2010 probably deserve to be taken seriously. They are considerably less rosy than what I was expecting. If they hold up it will be bad news for the country and terrible news for congressional Democrats.
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