Why You Should Prepare for Another Year of Slow Growth and High Unemployment

The Federal Reserve Bank of Philadelphia has released its latest forecasts for unemployment over the next several years, and the news isn’t good. By the fourth quarter of 2012 –- election time –- unemployment is expected to be at 8.7 percent. Worse, unemployment isn’t expected to dip below 8 percent until 2014. This could change if growth speeds up over the next year, but the prospects for that aren’t good. For the unemployment rate to drop by any amount, real GDP needs to grow by at least 2 percent. To see a significant reduction in employment, GDP growth needs to reach 4 percent or higher. According to Fed forecasts, the odds for that kind of growth in 2012 are incredibly low:

In other words, when you average the predictions made by Fed forecasters, odds of 2 percent to 3 percent GDP growth in 2012 are around 40 percent. The odds for 3 percent to 4 percent growth are below 20 percent, and the odds for anything greater are below 10 percent. The forecast for 2013 is improved -– the odds for 3 percent to 4 percent growth increase to 20 percent –- but not by much.

To speculate for a bit, if Mitt Romney is elected president –- with a Republican Congress –- will he be able to bring the GOP along for a new stimulus package? If Republican opposition to macroeconomic stablization is purely cynical, then I wouldn’t be shocked if Romney begins his presidency with a “Job Creation and Small Government Act of 2013.” But if some Republicans are genuinely opposed to stimulus –- and 2013 begins with a renewed focus on austerity measures -– it’s possible that we’ll see a mirror image of 2009-2012, where Democrats are reinvigorated by economy-driven discontent with Republicans and, as a result, win large majorities in congressional and off-year elections.