Saturday, October 13, 2012

Predicted Unemployment Rate Still to Be at 7.8% Through June 2013

The International Monetary Fund (I.M.F.) warned today that dealing effectively with the U.S. fiscal cliff is one of the most critical issues facing all of the world's economies. It also predicted that the economic situation will remain weak and said that the financial problems both in the U.S. and Europe are in desperate need of resolution.

I.M.F Urges U.S. and Europe to Act Decisively on Debt puts it this way:

"TOKYO — World finance officials called on the United States and Europe to quickly resolve their debt problems on Saturday, saying that more decisive action was needed to restore confidence in the faltering global economy.
In a communiqu√© at the end of a three-day meeting in Tokyo, the members of the International Monetary Fund warned that global growth was slowing as the continuing debt crises in developed countries dragged down growth in emerging markets. The statement said quick action was needed to “break negative feedback loops and restore the global economy to a path of strong, sustainable and balanced growth.”
“There was no objection to the recommendation that we gave to the membership, which was a-c-t,” said the I.M.F. head, Christine Lagarde, spelling out the word for dramatic emphasis.
The annual meetings here of the I.M.F. and the World Bank were focused on the negative impact on the world economy from the sovereign debt crisis in Europe, and the prospect of a so-called fiscal cliff looming in the United States as political leaders there remain deadlocked over how to reduce deficits.

The I.M.F. warned that economic stagnation in richer countries had spillover effects in poorer ones, which rely on exports to the developed world to lift themselves out of poverty. Its members also cautioned that the slowdown in the West was hurting growth in Asia, currently the world’s most dynamic economic region. . . . 
The scale of America’s fiscal problems was underscored just hours before the meeting in Tokyo, when the Obama administration announced that the budget deficit this year would reach $1.1 trillion, exceeding $1 trillion for a fourth straight year. While that is down from last year, U.S. deficits had never topped half a trillion dollars before the 2008 financial crisis."
And another survey from a group of leading economists forecasts tough times for the next several years as countries work through their debt, deficit and growth issues. In sum, these economists are predicting that unemployment will remain high and economic growth will remain low for at least another two years.

U.S. Growth Is Expected To Be Slow Into 2013 has the latest economic forecast by a distinguished group of 48 economists:

"The unemployment rate registered a dramatic 0.5 percentage-point drop over the past two months, but economists in the latest Wall Street Journal forecasting survey don't expect that pace of decline to continue.

"The general trend in the unemployment rate is lower, and this should continue to be true as long as the economy grows along the profile we project," said Joseph LaVorgna at Deutsche Bank.

"However, the cumulative five-tenths decline over the past two months appears to be overdone."

On average, the 48 respondents . . . expect the jobless rate will still be at 7.8% in June of next year—matching the September figure released last week. The reason for the stagnation in the job market is expectations for lackluster economic growth during the rest of 2012 and into 2013. Through the first half of next year, the average forecast is for growth in gross domestic product below 2% at a seasonally adjusted annual rate.

Expansion is seen picking up as the year progresses, but isn't expected to surpass 3% through 2014. That means that even when the unemployment rate does begin to fall, the economists don't see it doing so quickly. On average, they still expect the rate to be at 7.1% in December 2014....

To be sure, the economists don't see the U.S. falling into recession. They put just a 22% chance of another downturn hitting in the next 12 months. In fact, they put better odds—a 28% chance—that the economy will grow above 3% in 2013. But neither of those scenarios is seen as likely, and about two-thirds of the respondents say the risks remain more to the downside than upside.

A number of issues continue to weigh on U.S. growth, including a recession in Europe amid sovereign-debt problems and a slowdown in China. But the biggest question about the outlook for 2013 is a package of tax increases and spending cuts known as the "fiscal cliff" that is set to go into effect unless Congress acts to stop it.

If Congress fails to act through the first three months of 2013, the economists on average expect the fiscal cliff to shave 2.8 percentage points off first-quarter growth at an annualized rate. But that isn't considered the most likely scenario. The economists put the highest odds on a plan that delays a resolution, but doesn't seriously address underlying deficits.

If such an agreement could be reached, the economists think it would provide a boost to markets. When asked what would happen to stocks if a long-term debt plan were passed by Congress, some 40% of respondents said they would rise a lot while 50% thought they would increase a little. Just 10% said stocks would fall or remain unaffected.

Turning to the presidential election, 45% of respondents said a long-term deal on budget deficits next year is equally likely no matter which candidate wins. Another 45% said a Mitt Romney victory makes a deal more likely, and just 10% said the odds are best under President Barack Obama.

The economists are turning against government gridlock. Seventy percent of the respondents said the economy would be better off if one party controlled the White House and both houses of Congress."

Summing Up

The message is consistent and clear. Our U.S. Congress and President must take action to avoid the fiscal cliff.

Bo acting as grownups for a change, they would do something worthwhile for the nation and thereby help instill some lost confidence in America and the world that they're up to the job of governing by making common sense based compromise decisions.

If that nice surprise occurs around year end or soon thereafter, the U.S. could see quicker and somewhat stronger economic growth than is currently being predicted. If it doesn't happen, we could go back into recession.

Whatever happens, however, it's going to be a long multi-year slog to get our now sick economy back on track.

Failing to reach a compromise on the fiscal cliff would be a most irresponsible and dangerous thing for our nation's so-called political leadership to do.

Accordingly, I'm anticipating a favorable political compromise early in 2013. And I'm definitely hoping that's the case.

We simply can't afford to find out what would happen if going over the cliff suddenly became a reality.

The confidence of We the People in our "public servants" is already fragile enough as it is. Another jolt we don't need and our economy can't afford.

Thanks. Bob.

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