The FOMC Unemployment Blues

Buried deep in the Minutes of The Federal Open Market Committee for September 22 and 23 is the group’s forecast for joblessness. The committee’s conclusion is that “the unemployment rate moving down to about 9¼ percent by the end of 2010 and then falling to about 8 percent by the end of 2011.” Since these are consensus numbers, a large group among the participants believes that the jobs picture will be worse than that. Some of members certainly believe that unemployment will be above 10% through most of next year.

The most astonishing aspect of most economic forecast revisions now is that they take the rate at which GDP will grow up and raise their forecasts for the number of people who will be unemployed, too. It seems improbable that those two things can coexist in the economy. Economists still think that this recession will look like the last two, and that manufacturing and exports will grow quickly while millions of people are without work. Many companies are posting better profits, largely based on the productivity created by having smaller work forces and lower expenses. It is hard to see why these firms would hire people again unless they absolutely have to. Consumer demand is the most likely cause of improved sales at the majority of American companies. Consumers have no money. Corporate sales, therefore, stay low. The incentives for firms to add people to their payrolls don’t materialize. The circle gets more vicious each day.

Intel (NYSE:INTC) reported earnings on the 13th. A close look at the numbers shows that its numbers are just what analysts have feared. Revenue dropped $828 million from the same quarter last year to $9.2 billion, but EPS only dropped $.02 to $.33. Intel brought its costs down by $136 million. Some of that involved laying off people. Intel’s guidance for the current quarter was well received but it remains to be seen if it is a gain over the corresponding fiscal fourth quarter last year.

Someone among the economists is wrong. No matter what the Fed is saying, unemployment cannot stay above 10% for an extended period at the same time that GDP is moving above 6% for a sustained time.
Douglas A. McIntyre