The Federal Reserve issued, Minutes to their Open Market Committee Meeting from January 26-27, yesterday, February 17th and they predict that the economy will grow between 2.8% and 3.5% for 2010. Their projection was based on their readings of consumer spending, industrial production and business outlays on equipment and software which showed a recovery is underway, but it is at a very modest pace. The modest growth in GDP will be due to caution in hiring and spending because of the uncertainty regarding the economic outlook by businesses and the limited (or non-existent) access to credit by small businesses, (see, “Credit and the Small Business” on January 19, 2010). In effect, the patient has stabilized, but is still sick.
The modest growth will not improve the unemployment figures in 2010. The uncertainty that the employers feel regarding the economy and the uncertainty that individuals have after their personal balance sheets were decimated over the past two years will not translate into substantial consumer spending, increased inventories and available bank credit in the near future. The Fed is predicting that unemployment, the U3 will be at 9.5% to 9.7% at year-end. This is approximately where it is today.
If the Fed is correct regarding unemployment/employment figures then that would mean any increase in GDP will come from productivity increases generated by the existing labor force. This would appear to mean that more work/output will need to be generated by the existing labor force or price increases (inflation) for existing products or a combination of the two. An additional wild card, which we haven’t spoken of is the risk created by the deteriorating performance of commercial real estate and its potential effect on the fragile banking system. This could potentially restrain output and growth in employment over the coming year. Stay tuned…2010 is a year of recovery, which means we are still sick and our well being is on the way.
