Chicago Fed, GDP Contraction & Unemployment To Continue

Chicago is not representative of the entire Federal Reserve.  But it is a key district for manufacturing and is frequently used for forecasting many sectors of the economy.   Chicago Federal Reserve President Charles L. Evans gave a speech today, and this just adds more to Fed expectations of the recession continuing.  The Fed may also be too optimistic.

Evans sees GDP falling “markedly” during the first half of the year.  He said the contraction won’t even be compensated by the expected growth in the second half.

Evans expects that the “pace” of the economy will move back closer to its potential as the time moves through 2010.  He further noted that this will not be sufficient to close the widening gaps in the labor market.  He unemployment rates to continue to rise.

Evans believes the recession will keep the cost of living low, and noted that expenses should be under the core rate of 2%. While inflation targets matter, our main focus here is the GDP effect.  What is more important, a percentage move up in inflation or a percentage drop in GDP?

It seems as though the Fed is looking for positive growth in the second half on GDP.  We saw a long-term outlook in the last couple of months that seemed a bit rosy.  We at 24/7 Wall St. do not have any projections for GDP for the second half of 2008 yet, but we do not see positive GDP coming back.

While we believe that Q4 GDP may turn positive, that might just be because the last Q4 period was weak.  We also rank those hopes about equal to prayer, neither of which should be used in financial forecasting nor in investing strategies.

The Fed is telling you that GDP will get worse and unemployment will get worse.  Those are its assumptions.  What we are worried about is that the Fed may not be modeling in enough pain.  Yet.

Jon C. Ogg
February 11, 2009