In the wake of last Friday’s miracle job performance with unemployment dropping by .2% (see Jobs Contract 23rd Straight Month; Unemployment Rate Drop to 10.0%) let’s take a look at unemployment scenarios offered by the Fed to see how realistic they are.
Dave Rosenberg mentioned those scenarios in Breakfast with Dave on November 30, 2009.
Range OF Macro Outcomes is Extremely Wide
All you need to do is go to the Federal Open Market Committee (FOMC) minutes and see the wide divergence of views over the macro outlook, and this is coming from 17 of the nation’s top policymakers who also ostensibly keep in touch with each other. The range on 2010 GDP estimates is: 2.0% to 4.0%; for 2010, 2.5% to 4.6% for 2011, and 2.8% to 5.0% for 2012. These two percentage points are huge for a $14 trillion economy — we’re talking about differences that amount to $300 billion! The range on the unemployment rate forecast for 2010 is 8.6% to 10.2%; for 2011 it is 7.2% to 8.7%; and for 2012, the band is 6.1% to 7.6%. These ranges are massive. And, for the inflation rate, the range for 2010 is 1.1% to
So consider that at the Fed, there is one official that sees the potential for a return to full employment by 2012; and another that sees the prospect of deflation. These views are worlds apart and attest to our assertion that the band around any particular forecast in a post-bubble credit collapse is huge.
Fed’s 2012 Forecast
Let’s start with a look at the Fed’s 2012 forecast where the band is 6.1% to 7.6%.
Using Bernanke’s estimate that it takes 100,000 jobs a month to keep up with birthrate and demographics, the economy will have to create 260,000 jobs every month in 2010, 2011, and 2012 to hit an unemployment rate of 6.17% by the end of 2012.
To get to 7.6% by the end of 2012, the economy would have to average 200,000 jobs a month for the next three years.
- At the height of the internet bubble with a nonsensical Y2K scare on top of that, the economy managed to gain 264,000 jobs a month.
- At the height of the housing bubble in 2005, the economy added 212,000 jobs a month.
- At the height of the commercial real estate bubble with massive store expansion, the economy added somewhere between 96,000 and 178,000 jobs per month depending on where you mark the peak.
Neither the housing boom, nor the commercial real estate boom is coming back. Nor is there going to be another internet revolution. If anything, outsourcing of internet jobs to Asia is likely to remain intense.
No Genuine Driver For Jobs.
- The retail sector has massive overcapacity. We do not need more Home Depots, WalMarts, Lowes, Sears, Pizza Huts, Targets, Safeways, etc etc.
- Commercial real estate is flooded with vacant offices and plagued by falling rents.
- Housing inventory is enormous.
- Boomers will be looking to downsize their lifestyles.
- There is not going to be another internet boom.
It is well beyond absurd to expect the economy to average even 200,000 jobs a month, let alone 260,000 jobs a month when neither the housing boom nor the commercial real estate boom could manage those numbers over a sustained period.
In short, the Fed’s unemployment projections must be for some other planet or for some other alternate universe somewhere because they do not reflect reality here.
My Baseline Scenario
That is what my baseline scenario looks like (revised today to reflect November job numbers).
Extremely Generous Assumptions
- I am assuming there will be job gains (on average) in 2010 even though history suggests otherwise.
- I have the number of jobs gained per month increasing to 170,000 jobs per month for 2013 even though I think 150,000 is a more realistic maximum target for an entire year.
- I have +150,000 jobs for 4 consecutive years through 2016.
- I have the Labor Pool decreasing dramatically as a result of boomer demographics starting in 2014.This acts to lower the unemployment rate.
- I have the participation rate falling every year, accelerating rapidly starting in 2014 all the way through 2020.
I used a labor pool increase of 120,000 a month rather than Bernanke’s 100,000 a month to accommodate re-entry of marginally attached workers into the job force (people start looking for jobs because they think they may be available).
Moreover, I assume there will not be a double dip recession or any recession of any kind for a decade.
Note the first box on the chart contains a one month projections (for December 2009), while all the rest of the numbers are for full years.
Download The Spreadsheet
Click here for a downloadable spreadsheet where you can enter your own assumptions and create a graph for your assumptions.
For details on how to use the spreadsheet and more details on my assumptions please see Mish Unemployment Projections Through 2020.
For John Mauldin’s assumptions please see Mapping Unemployment – You Make The Call – Downloadable Spreadsheet