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The Fed's Unemployment Projections From Mars


They certainly don't reflect any reality here on Earth.


In the wake of last Friday's miracle job performance with unemployment dropping by .2% (see Jobs Contract 23rd Straight Month; Unemployment Rate Drop to 10.0%) let's take a look at unemployment scenarios offered by the Fed to see how realistic they are.

Dave Rosenberg mentioned those scenarios in Breakfast with Dave on November 30, 2009.

Range Of Macro Outcomes is Extremely Wide

All you need to do is go to the Federal Open Market Committee (FOMC) minutes and see the wide divergence of views over the macro outlook, and this is coming from 17 of the nation's top policymakers who also ostensibly keep in touch with each other. The range on 2010 GDP estimates is: 2.0% to 4.0%; for 2010, 2.5% to 4.6% for 2011, and 2.8% to 5.0% for 2012. These two percentage points are huge for a $14 trillion economy -- we're talking about differences that amount to $300 billion! The range on the unemployment rate forecast for 2010 is 8.6% to 10.2%; for 2011 it is 7.2% to 8.7%; and for 2012, the band is 6.1% to 7.6%. These ranges are massive. And, for the inflation rate, the range for 2010 is 1.1% to 2.0

So consider that at the Fed, there is one official that sees the potential for a return to full employment by 2012; and another that sees the prospect of deflation. These views are worlds apart and attest to our assertion that the band around any particular forecast in a post-bubble credit collapse is huge.

Fed's 2012 Forecast

Let's start with a look at the Fed's 2012 forecast where the band is 6.1% to 7.6%.

Using Bernanke's estimate that it takes 100,000 jobs a month to keep up with birthrate and demographics, the economy will have to create 260,000 jobs a month, every month in 2010, 2011, and 2012 to hit an unemployment rate of 6.17% at the end of 2012.

To get to 7.6% by the end of 2012, the economy would have to average 200,000 jobs a month for the next three years.

2000-2009 Perspective

  • At the height of the Internet bubble with a nonsensical Y2K scare on top of that, the economy managed to gain 264,000 jobs a month.

  • At the height of the housing bubble in 2005, the economy added 212,000 jobs a month.

  • At the height of the commercial real estate bubble with massive store expansion, the economy added somewhere between 96,000 and 178,000 jobs per month depending on where you mark the peak.

Neither the housing boom, nor the commercial real estate boom is coming back. Nor is there going to be another Internet revolution. If anything, outsourcing of Internet jobs to Asia is likely to remain intense.

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