While at a conference for CPAs, I had the opportunity to listen to someone from the Federal Reserve Bank System speak. He indicated that the Fed sees unemployment peaking in 1Q 2010. Unfortunately he showed a graph that was put together 2 months ago that showed projected unemployment rates for September and October that were considerably lower than where we are in reality. So much for the Fed’s economic forecasting ability. Earlier this week, the National Association for Business Economics released a similar prediction.  I’m dumbfounded as to why they hold this view.  Unemployment in US recessions tends to peak a year or more after the bottom of a recession. The previous recession (2001) saw unemployment peak 21 months after the recession supposedly troughed.  IF the recession ended in July this year, then we should expect unemployment to continue rising until the end of 2010 even into early 2011, not Q1 2010.

Similarly economists are predicting that the US unemployment rate will be back to where it was by 2012.  This is virtually impossible. Given that businesses have reduced the work week to the shortest (33 hours) since WWII, the first thing a small business owner will do when faced with business growth prospects is extend the work week to those still working with currently reduced hours. It is the lowest risk move. We will not see unemployment back around 5% for at least 6 years, and likely closer to 10.

I spoke with the Fed representative (at the CPA conference) and asked him why the San Francisco Fed President is indicating that 3Q 2009 GDP growth will be reduced from 3.5% to 2.5% and yet he is still quoting 3.5%, and 3%+ GDP growth for 4Q 2009 through 2010.  He did not have a reconcilable answer.  Note: today (Tuesday Nov 24th) – 3Q US GDP growth was reduced from 3.5% to 2.8%. The Commerce department releases three estimates of GDP for a given quarter. The preliminary report, is followed by a more accurate second/ revised GDP report, and third is the final report with as much data as there is likely to be (and hence the most accurate reading). Also note a continued downward trend in revised GDP and economic data. This has been going on all year. The preliminary data looks less bad, the stock market bases its moves on the data, then when most of the players in the stock market have moved on, the data is revised weaker. A head fake that causes markets to be based on something other than reality.