US Fed lowers economic outlook for 2011

WASHINGTON (AP) — Unemployment is set to remain higher longer than previously thought, according to new projections from the Federal Reserve that would mean more than 10 million Americans remain jobless through the 2012 elections — even as a separate report shows corporate profits reaching their highest levels ever.

Top Federal Reserve officials project that the unemployment rate, now 9.6 percent, will fall only to around nine percent at the end of 2011 and around eight percent when the next presidential election arrives in late 2012. The central bankers had envisioned a more rapid decline in joblessness in their previous forecasts, prepared in June.

The sober economic forecast comes despite signs that the recovery is picking up slightly. The Commerce Department said Tuesday that gross domestic product rose at a 2.5 percent annual rate in the three months ending in September, not two percent as earlier estimated. And there have been solid readings in recent weeks on job creation, manufacturing and retail.

The apparent contradiction reflects the brutal math that faces a nation trying claw out of a deep recession: Moderate growth, which would be fine in normal times, will do little to bring down sky-high joblessness, a reality reflected in the Fed’s forecasts.

Even as conditions are likely to remain miserable for job seekers for years to come, an extraordinary bounce-back is under way in the nation’s corporate sector, with profits rebounding 28 percent over the past year to an all-time high in the third quarter.

Businesses’ spending on compensation for employees by contrast, rose only 7.6 percent.

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 growth in profits from US firms doing business overseas.

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 three 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.

“There are structural issues or residue from the financial crisis and the housing bubble restraining the economy,” said Alan Levenson, chief economist at T. Rowe Price. “It’s not even close to being a garden-variety cyclical recovery.”

It was these diminished expectations for growth that led Fed officials this month to announce plans to buy $600 billion in Treasury bonds in a bid to drive down long-term interest rates and pump up growth.

“Though the economic recovery was continuing,” Fed policymakers considered progress to be “disappointingly slow,” according to minutes of the meeting released Tuesday. “Moreover, members generally thought that progress was likely to remain slow.”

Since the decision, the criticism directed at the Fed has been loud as foreign finance ministers, Republican members of Congress, and conservative economists and media personalities bashed the move.

But most Fed officials expected the results of bond purchases “to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the committee’s mandate.” Some also thought the action would offer insurance against a further drop in inflation or against the “small probability” of persistent deflation.

But the document also leaves little doubt that several Fed officials remain uneasy with the action. Some anticipated that they would have only a “limited” effect on the pace of recovery, arguing the action should only be taken if the odds of deflation “increased materially.”

And several “noted concern” that the action “could put unwanted downward pressure on the dollar’s value in foreign exchange markets” or “an undesirably large increase inflation.”