Fed revises jobless forecast; 8% on election day?

Rick Moran
The Federal Reserve has revised their numbers for the second quarter and found that the economy grew at a slightly better rate than previously thought; 2.5% instead of 2%. They also reported record corporate profits, up 28% over a year ago.

But it was the unemployment projections that should cause the White House to be sweating the 2012 election - as if they weren't already. The jobless rate will drop much more slowly than anticipated, down to 9% at the end of 2011 and to 8% by election day, 2012.

Among the reasons for the strong earnings growth were that financial companies are no longer suffering from massive write-downs on bad investments as they were in 2008 and profits from U.S. firms doing business overseas have shot up.The economic recovery, which had earlier been driven in large part by government stimulus spending, is now increasingly fueled by demand from consumers and businesses. That shift had been in doubt as recently as the summer, when growth had noticeably slowed.

The Fed's top policymakers project that gross domestic product will rise 3 to 3.6 percent next year - which would represent a solid acceleration from the past two quarters but still would only be enough to bring the unemployment rate to the 8.9 to 9.1 percent range in the final months of 2011 and 7.7 to 8.2 percent at the end of 2012.

The officials also increased their estimate of how low the nation's unemployment rate could ultimately go without stoking inflation. Several estimated that level is 6 percent or higher, not the 5 to 5.3 percent earlier thought.

Might the European debt crisis alter these projections? As long as the European central banks are of a mind to bail out Ireland, Greece, Portugal, Spain, and the rest of them, probably not. They haven't yet run out of other people's money in Europe to spend. That's not expected to happen unless there is a "Round 2" of bailouts - especially for Greece which is far from being out of the woods yet.

If banks start failing in Europe despite the bailouts, we may yet see a repeat of a financial meltdown here - probably less severe, but damaging to growth here as well. The question that they are asking at the White House is, "Can we win if unemployment is at 8%?"

It would be unprecedented but not out of the question. Reagan won re-election in 1984 with a rate well over 7% while Al Gore lost in 2000 with the jobless number at 3.9%. It would appear that the perception of the voters about the direction of unemployment - going up or down - was more important than the actual number.

It would be a hard sell, but given the fact that Obama will have a huge war chest, not to mention the enormous power of incumbency, it would seem that the president is far from being a sure loser despite his extraordinary mismanagement of the economy and out of control spending.

The Federal Reserve has revised their numbers for the second quarter and found that the economy grew at a slightly better rate than previously thought; 2.5% instead of 2%. They also reported record corporate profits, up 28% over a year ago.

But it was the unemployment projections that should cause the White House to be sweating the 2012 election - as if they weren't already. The jobless rate will drop much more slowly than anticipated, down to 9% at the end of 2011 and to 8% by election day, 2012.

Among the reasons for the strong earnings growth were that financial companies are no longer suffering from massive write-downs on bad investments as they were in 2008 and profits from U.S. firms doing business overseas have shot up.

The economic recovery, which had earlier been driven in large part by government stimulus spending, is now increasingly fueled by demand from consumers and businesses. That shift had been in doubt as recently as the summer, when growth had noticeably slowed.

The Fed's top policymakers project that gross domestic product will rise 3 to 3.6 percent next year - which would represent a solid acceleration from the past two quarters but still would only be enough to bring the unemployment rate to the 8.9 to 9.1 percent range in the final months of 2011 and 7.7 to 8.2 percent at the end of 2012.

The officials also increased their estimate of how low the nation's unemployment rate could ultimately go without stoking inflation. Several estimated that level is 6 percent or higher, not the 5 to 5.3 percent earlier thought.

Might the European debt crisis alter these projections? As long as the European central banks are of a mind to bail out Ireland, Greece, Portugal, Spain, and the rest of them, probably not. They haven't yet run out of other people's money in Europe to spend. That's not expected to happen unless there is a "Round 2" of bailouts - especially for Greece which is far from being out of the woods yet.

If banks start failing in Europe despite the bailouts, we may yet see a repeat of a financial meltdown here - probably less severe, but damaging to growth here as well. The question that they are asking at the White House is, "Can we win if unemployment is at 8%?"

It would be unprecedented but not out of the question. Reagan won re-election in 1984 with a rate well over 7% while Al Gore lost in 2000 with the jobless number at 3.9%. It would appear that the perception of the voters about the direction of unemployment - going up or down - was more important than the actual number.

It would be a hard sell, but given the fact that Obama will have a huge war chest, not to mention the enormous power of incumbency, it would seem that the president is far from being a sure loser despite his extraordinary mismanagement of the economy and out of control spending.