Fed forecasts a sluggish, jobless recovery

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By David M. Dickson

Unemployment will likely remain at historically high levels well beyond next year, Federal Reserve officials said Tuesday as they forecast a sluggish, jobless economic recovery that will be vulnerable to shocks.

Tight bank credit will make it especially difficult for small businesses to increase their payrolls even as the recovery progresses, the Fed officials said.

The U.S. unemployment rate, which has more than doubled since the recession began in December 2007, jumped from 9.8 percent in September to 10.2 percent in October, the highest level since 1983.

"The U.S. experienced so-called jobless recoveries following the two previous recessions in 1991 and 2001," said Janet Yellen, president of the Federal Reserve Bank of San Francisco. "Unfortunately, things seem to be shaping up similarly this time around," said Ms. Yellen, who served a 2 1/2-year stint as chairman of the White House Council of Economic Advisers during the Clinton administration.

A big difference between the current jobless recovery and the ones that followed the previous two economic downturns is the level at which the unemployment rate peaked after the recessions ended.

The jobless rate peaked at 7.8 percent in June 1992, 15 months after the trough of the 1990-91 recession. The unemployment rate reached 6.3 percent in June 2003, 19 months after the 2001 recession ended. Last month, three or four months after the latest recession ended, the unemployment rate was 10.2 percent and rising.

"It's hard to be encouraged about a fast rebound in job growth," said Dennis Lockhart, president of the Federal Reserve Bank of Atlanta. He expects "very slow net job gains once the [downward] trend reverses."

During the 22 consecutive months of job losses, the U.S. economy has shed more than 8 million payroll jobs as the level of unemployed workers has surged from 7.5 million to 15.7 million, 36 percent of whom have been out of work longer than six months, according to Labor Department data. Nearly 2 million fewer workers are employed in the private sector today than 10 years ago.

In September, the Labor Department reported Tuesday, there were more than six unemployed people for each of the 2.5 million job openings, a historically high ratio that has contributed to low levels of consumer confidence.

Both Ms. Yellen and Mr. Lockhart reported that their business contacts said they were reluctant to hire until clear evidence emerged demonstrating that the nascent recovery was sustainable.

Last month, the Commerce Department reported that the economy expanded at an annual rate of 3.5 percent during the third quarter, following four consecutive quarterly declines.

In her speech in Phoenix on Tuesday, Ms. Yellen said she expects the overall economic recovery to be "gradual and remain vulnerable to shocks." She added that the recovery would likely resemble the letter "L" with a gradual upward tilt at the base.

"With such a slow rebound, unemployment could well stay high for several years to come," she warned. "Smaller businesses without direct access to capital markets are particularly feeling the pinch."

Mr. Lockhart agreed that small businesses have been hit hard. "In the 2001 recession, small firms" - those with fewer than 50 employees - "held up reasonably well and accounted for 9 percent of net job loss," he said in his Atlanta speech. "In this recession, however, small firms have accounted for about 45 percent of net job losses per our most recent data through the end of 2008."

The future looks grim. "Small businesses report conditions are still very difficult in obtaining credit," said Sam Bullard, an economist at Wells Fargo.