Within 3 Days, AP's Reported Unemployment Estimates Significantly Worsen

November 27th, 2010 8:39 PM

In separate reports for the Associated Press during the past week, Christopher Rugaber and Jeannine Aversa, economics writers for the wire service, each dealt with estimates for next year's average unemployment rate. They came back with significantly different predictions for 2011 without recognizing how widely those estimates varied.

On Tuesday, Rugaber dealt with the Federal Reserve's latest economic growth projections, in the process telling readers that the Fed expects that the unemployment rate "will be 8.9 percent to 9.1 percent in 2011."

On Friday, Aversa looked at three alternative proposals for handling next year's federal income tax rates, which will increase substantially for everyone unless Congress acts. The projected unemployment rates for next year under the three proposals are all either 9.9% or 10.0%.

So the Fed thinks that unemployment will come down next year, while Aversa's consulted experts think it will go up slightly regardless of what Congress does or doesn't do about taxes. The one-point difference between the two sets of estimates represents about 1.5 million workers. That's not a small number. Did things suddenly get worse while the turkeys were cooking on Thursday?

Maybe, maybe not. But it is clear from Rugaber's report that the Fed's unemployment outlook has turned more grim in the past five months:

Federal Reserve officials have become more pessimistic in their economic outlook through next year and have lowered their forecast for growth.

 

The economy will grow only 2.4 percent to 2.5 percent this year, Fed officials said Tuesday in an updated forecast. That's down sharply from a previous projection of 3 percent to 3.5 percent. Next year, the economy will expand by 3 percent to 3.6 percent, the Fed said, also much lower than its June forecast.

 

Fed officials project that unemployment won't change much this year, averaging between 9.5 percent and 9.7 percent. The current unemployment rate is 9.6 percent. Progress in reducing unemployment has been "disappointingly slow," the central bank said, according to the minutes of its Nov. 2-3 meeting.

 

... The jobless rate will be 8.9 percent to 9.1 percent in 2011, Fed officials predict. That's much worse than June's projection of 8.3 percent to 8.7 percent.

 

By 2012, when President Barack Obama faces the electorate, unemployment will be 7.7 percent to 8.2 percent, up from the previous forecast of 7.1 percent to 7.5 percent.

Gosh, this bad news about the continually decaying projected employment situation has sure been quiet. I won't even bother asking if it made the Big Three networks' evening newscasts.

But Ben Bernanke & Co.'s estimates are optimistic compared to those Aversa relayed in the midst of presenting three possible scenarios for dealing with next year's scheduled tax increases:

OPTION ONE: Let the tax rates for the highest earners rise back to what they were before 2001, when the first round of Bush tax cuts was passed. But extend them permanently for everyone else. This is what Obama favors.

 

Moody's Analytics says that under this scenario, the economy would grow 2.6 percent in 2011. That's better than the scant 0.9 percent growth envisioned if everyone's tax cuts expired.

 

Economists note that low- and middle-income people tend to spend more of their take-home pay than the highest-earners do. That's especially true in a tough economy.

 

Still, unemployment would average 10 percent next year, up from the 9.7 percent estimated for this year. The jobless rate would tick up as growth weakened slightly next year.

 

... OPTION TWO: Extend the tax cuts for one or two years for the highest earners and permanently for everyone else.

 

Moody's Analytics estimates this scenario would help the economy more than the first approach. The economy would grow 2.95 percent next year - a 0.4 percentage point improvement over Option One.

 

Unemployment would average 9.9 percent next year.

 

OPTION THREE: Make the tax cuts permanent for everyone. This is the plan Republicans favor.

 

By Moody's calculations, the impact on unemployment, growth and the deficit in 2011 would be the same as in Option Two.

Aversa's report is deeply marred by the pervasive assumption that consumer spending is what drives economic growth. Only in her final paragraphs does she get to economist Allen Sinai, who tells us that, in the AP reporter's words, "letting the tax cuts for high-income Americans expire could reduce the flow of money into private equity firms, venture capital and other investments that 'grease the wheels of entrepreneurship in the U.S. economy.'"

But the bigger story in Aversa's report is that the tax analysts she consulted all believe that the unemployment rate is going up next year, no matter what. Maybe she should let Chris Rugaber, and more importantly Ben Bernanke, know.

Cross-posted at BizzyBlog.com.