Bernanke: Fed Predicts Post-WWII Record 73 Months of 7%+ Unemployment

By Terence P. Jeffrey | July 18, 2012 | 2:30 PM EDT

Federal Reserve Chairman Ben Bernanke (AP Photo/Carolyn Kaster)

( - Federal Reserve Chairman Ben Bernanke told the House Financial Services Committee on Wednesday that the Federal Open Market Committee (FOMC) is predicting that the national unemployment rate will remain at 7 percent or higher through 2014, which would extend to 73 the number of consecutive months in which the unemployment rate has remained above 7 percent—a post-World War II record.

“However, given that growth is projected to be not much above the rate needed to absorb new entrants to the labor force, the reduction in the unemployment rate seems likely to be frustratingly slow,” Bernanke told the committee. “Indeed, the central tendency of participants’ forecasts now has the unemployment rate at 7 percent or higher at the end of 2014.”

The Federal Reserve Board of Governor's biannual "Monetary Policy Report to Congress," which Bernanke submitted to the committee, said the FMOC was predicting that what it now considered the "longer-run normal rate" of unemployment--5.2 percent to 6.0 percent--would take another five or six years to achieve.

That would be by 2017 or 2018.

The Bureau of Labor Statistics has calculated the month-by-month unemployment rate since January 1948. Since then, the longest stretch of 7-percent-plus unemployment was 68 months---from May 1980 through December 1985.

(In January 1986, unemployment dipped to 6.7 percent. It then rose back above 7 percent for the six-month stretch from February through July 1986, before dropping back to 6.9 percent in August of that year.)

The current stretch of 7-percent-plus unemployment began in December 2008, according to BLS. June 2012 marked 43rd straight month of 7-percent-plus unemployment. If unemployment remains above 7 percent for the 30 months between now and the end of 2014, as the FMOC predicts, that will make 73 straight months of 7-percent-plus unemployment.

That is unprecedented in the post-World War II era.

The Census Bureau has published annual unemployment rates for the years from 1900 to 1947. From 1900 through 1929, the annual unemployment rate exceeded 7 percent in only three years: 1914, 1915 and 1921, when it was 7.9 percent, 8.5 percent and 11.7 percent respectively. In the 12 years from 1930 through 1941, the annual unemployment rate exceeded 7 percent every year—hitting, sequentially, 8.9 percent, 16.3 percent, 24.1 percent, 25.2 percent, 22.0 percent, 20.3 percent, 17.0 percent, 14.3 percent, 19.1 percent, 17.2 percent, 14.6 percent, and 9.9 percent.

But, in 1942, the first year after Pearl Harbor, unemployment dropped to 4.7 percent. For the three subsequent years of World War II, it was 1.9 percent, 1.2 percent and 1.9 percent respectively. In both 1946 and 1947, it was 3.9 percent.

The Federal Reserve Board of Governor’s biannual “Monetary Policy Report to Congress” that Bernanke presented to the committee explained that the Fed’s projections on unemployment and economic growth are derived from assessments made by the 19 people who participate in the FMOC’s deliberations. These include the 7 members of the Federal Reserve Board of Governors and the 12 presidents of the Federal Reserve Banks.

In order to derive what the Fed calls the “central tendency” among these assessments, the three highest and three lowest assessments are dropped, leaving the range of the middle 13.

In the current report, the “central tendency” was that the unemployment rate would be between 8.0 to 8.2 percent at the end of 2012, 7.5 percent and 8.0 percent at the end of 2013, and 7.0 percent and 7.7 percent at the end of 2014.

The pessimism of the Fed’s outlook is underscored by the fact that not one of the seven members of Board of Governor or the 12 presidents of the Federal Reserve Banks predicted unemployment would drop below 7 percent by the end of 2013. The full range of all 19 assessments was that the unemployment rate would be between 7.0 percent and 8.1 percent by the end of next year.

Significantly, the Fed’s assessors are also projecting what the Fed calls a “longer-run normal rate of unemployment” of between 5.2 percent and 6.0 percent.

In very recent history—from December 2005 through April 2008—the United States had a run of 29 straight months when unemployment never went as high as 5.2 percent.

Also in very recent history—from July 1997 to August 2001—the United States had a run of 50 straight months where unemployment never exceeded 4.9 percent, and, in one month, dropped as low as 3.8 percent.

The Fed does not see happy days like that anywhere on America’s economic horizon.

“The central tendency of participants’ estimates of the longer-run normal rate of unemployment that would prevail under the assumption of appropriate monetary policy and the absence of further shocks to the economy was 5.2 percent to 6.0 percent,” said the Federal Reserve Board of Governor’s report.

Most of the Fed assessors did not believe that this new “normal” rate of unemployment could be achieved until at least five or six years from now.

“Most participants,” said the report, “projected that the gap between the current unemployment rate and their estimates of its longer-run normal rate would be closed in five or six years, a couple judged that less time would be needed, and one thought more time would be necessary because of the persistent headwinds impeding the economic expansion.”

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