The US Federal Reserve has sent a message to financial markets, investors, policymakers in other countries and anyone else who cares to listen: not only will American unemployment be higher for longer, but by implication, so will jobless levels in other economies.
The message was buried in the minutes of the late-April Fed meeting released overnight, where a difference of opinion about the strength of the US economy emerged between Fed staff and members of the key Open Markets Committee.
While acknowledging that there had been a steadying in economic activity, Fed members cut their forecasts for US economic growth and more importantly boosted estimates for unemployment, which will remain higher for longer.
The minutes were released amid further signs that risk aversion in financial markets was continuing to ease: the Australian dollar topped 78 US cents overnight (that’s up nearly 4 US cents this week alone), gold is around $US938 an ounce, copper rose 2% and oil topped $US62 a barrel. Wall Street fell after the Fed minutes were released.
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The Fed not only cut its 2009 growth forecast, but also the one for next year, which surprised analysts in American markets.
But the the minutes also said the Fed staff had “revised up” the more recent outlook in response to recent favorable financial developments as well as better-than-expected readings on final sales. That was a far more bullish reading of the economy than in the latest official forecasts in the minutes of the Committee.
“The staff’s projections for economic activity in the second half of 2009 and in 2010 were revised up, with real GDP expected to edge higher in the second half and then increase moderately next year” before growing “at a rate well above that of its potential” in 2011.
That’s a rare difference, as sketched in the minutes which show the Open Markets Committee formally adopted its new formal quarterly forecast of US growth declining at an annual rate in a range of 1.3% to 2.0% in the 4th quarter of 2009. Again, the January forecast was for a contraction in the range of 0.5% to 1.3%.
But the forecasts for unemployment were lifted noticeably and the central forecast adopted in late April is for unemployment to be between 9%-9.5% in the final quarter of 2010 and to remain between 7.7% to 8.5% in the final quarter of 2011.
That means the number of unemployed will be around 8.5% for much of 2011 — that’s two years away.
The Fed expects “household demand would gradually strengthen over the coming quarters” but that this process would be “slow”. Some members of the Committee indicated (according to the minutes) that “activity in the housing market might finally be approaching a trough” and reported “some signs that the decline in house prices might be slowing”. That’s the basis for the so-called ‘green shoots’.
But they noted that “labour market conditions were still deteriorating” and the “volume of credit extended to households and businesses was still contracting”.
Overall, the minutes reveal that Fed policymakers believed the recovery would probably be weak for an extended period. Credit market strains, difficulties reallocating labour, household retrenchment, diminishing fiscal stimulus and weak export demand “would be likely to restrain the pace of economic activity over the medium term”.
For countries like Australia, this should be of concern, but not necessarily domestically. It could mean a much slower recovery for Australian exporters operating in sluggish overseas economies: Boral, Brambles, James Hardie, BlueScope immediately spring to mind.