Underestimating Unemployment An FOMC Pastime Since 2007

Every quarter, the Federal Reserve’s Open Market Committee releases its economic prognostications for the U.S. economy, looking ahead at the predicted changes in GDP growth, unemployment rate and both PCE and core PCE inflation.  These economic projections are provided to help those of us that are mere mortals get a sense of where the economy is headed and, in particular, the direction that the Federal Reserve’s braintrust is expected to take to keep the economy firing on all cylinders.  With the Fed about to push rates up another 25 basis points and unemployment hovering around post-Great Recession lows, it is an interesting exercise to look back in time to the era before the Great Recession and see what the FOMC anticipated for the U.S. unemployment rate.

Let’s open by looking at what has happened to the U-3 headline unemployment rate from just prior to the Great Recession to the present keeping in mind that the latest recession officially started in December 2007 and ended in June 2009:

Now, let’s look at the Summary of Economic Projections from the October 30 and 31, 2007 FOMC meeting, the last meeting held before the Great Recession officially began and the first meeting where these projections were made available to the general public:

Here is a quote about unemployment from the summary:

Most participants expected that, with output growth running somewhat below trend over the next year or so, the unemployment rate would increase modestly. The central tendency of participants’ projections for the average rate of unemployment in the fourth quarter of 2008 was 4.8 to 4.9 percent, slightly above the 4-3/4 percent unemployment rate forecasted in June; these projections suggested the emergence of a little slack in labor markets. The central tendency of participants’ projections was for the unemployment rate to stabilize in 2009 and to fall back a bit in 2010 as output and employment growth pick up.” (my bold)

And how did that turn out for Main Street America?

Here is a table showing what was predicted at the October 2007 meeting and what actually occurred:

While hindsight is always 20:20, even with all of the economic tools at their disposal, the FOMC seemed completely oblivious to the fact that a major recession was on the doorstep and that the headline unemployment rate would peak at more than double the rates that they predicted.  It also appears that the members of the FOMC suffered from what can only be termed a bad case of “cluster thinking”.

Now, let’s look at the Summary of Economic Projections from the meeting held on January 27 and 28, 2009, during the dark days of the Great Recession:

You will notice that the range in the projected unemployment rate is far broader than it was back in late 2007.  As well, you will also notice that the projections made in January 2009 were far more pessimistic than the projections from the October 2008 meeting.  Apparently, the FOMC woke up and realized the economic plight that faced millions of American workers who found themselves on the wrong end of a layoff notice.  That said, as pessimistic as they were, their prognoses for unemployment was still substantially better than the reality, particularly for 2010 and 2011 as you can see on this table:

Once again, the FOMC’s projections have no connection to reality.

Let’s skip ahead and look at the Summary of Economic Projections from the first meeting held after the official end of the Great Recession on November 3 and 4, 2009:

As was the case in January 2009, the range in the projected unemployment rate is quite broad but, as in the three earlier meetings, the members of the FOMC significantly underestimated the resilience of the American labor market and the effectiveness of their monetary policy experimentation on actually creating jobs for millions of unemployed workers as you can see on this table:

As we noted in the three earlier meetings, the members of the FOMC significantly underestimated the resilience of the American labor market and the effectiveness of their monetary policy experimentation on actually creating jobs for millions of unemployed workers.

Now that we have that background, let’s close this posting with a look at the latest version of the Summary of Economic Projections that has been released to the public from the FOMC meeting held on December 13 and 14, 2016:

Apparently, there is just no end to the exuberance that the members of the FOMC exhibit for their ability to keep the U.S. economy growing and Corporate America’s ability to keep American workers from sitting at home, watching television and waiting for their monthly government-funded unemployment stipend.

Let’s close this posting with a look at the length of economic cycles in the United States going back to 1854:

On average, for the 33 cycles since 1854, trough to peak expansions have averaged 38.7 months in length with peak to trough contractions lasting an average of 17.5 months.  In the 11 cycles since 1945, trough to peak expansions have lasted 58.4 months in length with peak to trough contractions lasting an average of 11.4 months.  Since the trough in June 2009, the economy has been expanding for 91 months, putting it in the top four expansions in terms of length.  While we have no idea what the future holds for the unemployment rate, the fact that the U.S. economy is already into near-record territory when it comes to the length of the post-Great Recession expansion, I would suggest that the Federal Reserve’s expectation that unemployment will remain in the 4 to 5 percent range through 2017, 2018 and 2019 is highly optimistic even if they continue to work their monetary policy “black magic” on the U.S. economy.

From this posting, we can clearly see that, in the hands of central bankers, economics is little more than “junk science”.  The Fed’s inability to see the reality of the U.S unemployment situation is nothing less than mind-boggling.

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