What do forecasters say about how the economy will fare in 2011? This is a difficult question to answer as there are lots of changing forecasts of the U.S. economy. What is true is that in recent months, most forecasters have become increasingly optimistic about the economic outlook for the U.S. economy. This increased optimism stems in large part from the December signing of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 [2]. For instance, yesterday the IMF released its update to the World Economic Outlook (WEO [3]), and the forecasts for U.S. GDP growth in 2011 was boosted to 3.0 percent, a 0.7 percentage point bump from the WEO’s October 2010 projections. The Blue Chip Economic Indicators (a collection of about 50 forecasters) tells a similar story: the consensus projection for economic growth for 2011 increased by 0.6 percentage point between November 2010 and January 2011.
Okay, so the economy is going to grow more quickly, and so that should be good news for the unemployment rate, right? Well, forecasters haven’t budged their unemployment forecasts much. In fact, in January the consensus Blue Chip forecast for the unemployment rate for the fourth quarter of 2011 was 9.1 percent, the same level as in November.
How can we have higher expected growth, but no change in the expected unemployment rate? There are a couple of reasons. First, the higher economic growth can be coupled with higher productivity growth—that is, we produce more, but because worker productivity has risen, we don’t need many more workers. Hmmm… but the economic growth forecasts were likely boosted because of higher demand (and perhaps greater optimism), not because productivity is accelerating.
Second, modeling the unemployment rate is a tricky business, as it depends on not just how many jobs are being created, but also what will happen to the labor force participation rate (basically, it’s hard to forecast how many folks will re-enter the labor force as the economy gains steam). Although it is hard to model the unemployment rate, do forecasters now see a much bigger surge back into the labor force than they thought a couple of months ago? Maybe, but I doubt it.
Third, and this is much more speculative, I wonder did the last several monthly employment reports (which came in below expectations) dampen the outlook for the labor market? If this is the case, then I wouldn’t be surprised if forecasters become more optimistic about the labor market (and a falling unemployment rate) when monthly nonfarm payrolls start coming in at higher levels. Again, that’s speculation.
~Mark Doms, Chief Economist, U.S. Department of Commerce
January 26, 2011