Bernanke Not Fooled by Recent Unemployment Gains

A survey released Friday by the Philadelphia Federal Reserve indicates a majority of the 45 economists invited to participate now believe U.S. unemployment will fall faster this year than previously expected. Those completing the study predict that unemployment will fall to 8.1 percent by the fourth quarter of 2012. A similar survey released this past November was considerably less optimistic with 8.7 percent expected to be the best that could be hoped for this year.

The change in outlook is understandable given the dramatic improvement over the past few months. Just over a year ago, unemployment was at 9.4 percent but as 2011 drew to a close, unemployment had fallen to 8.5 percent. The declining trend continued in January, with unemployment falling to a three-year low of 8.3 percent and it appears that February could bring even more employment gains.

For the first week of February, the U.S. Department of Labor said that the number of people applying for unemployment fell to a seasonally-adjusted 358,000 new applicants. This is the second-lowest level since April 2008 and is a decline of more than 15,000 applicants from the previous week.

Given the string of good news announcements, you would think U.S. Federal Reserve Chair Ben Bernanke would be smiling a bit more these days. But no, the Chairman continues to warn of rising unemployment even when most others believe the job market is improving. Does the Chairman know something the rest of us don’t? Or perhaps he just doesn’t believe the numbers.

In his testimony before the Senate Budget Committee last week, Bernanke said that even with an improving outlook, the U.S. economy will grow at a “sluggish” rate for the remainder of the year. The Fed continues to hold to its earlier outlook that growth will range between 2.2 percent and 2.7 percent for the year with unemployment between 8.2 percent and 8.5 percent by the final quarter of 2012.

Bernanke admonished the Committee saying “it is very important to look not just at the unemployment rate which reflects only people who are actively seeking work”. The term “actively” is key here and Bernanke as much as admits that the current unemployment rate is misleading as it does not include those who are “out of the labor force because they don’t think they can find work”.

Bernanke also cautioned that the ongoing Eurozone debt crisis has the potential to plunge the global economy back into recession. While Bernanke did not go so far as to say that a recession in the Eurozone is inevitable, it is clear that the Fed is erring on the side of caution acknowledging that a recession is a “possibility”.

What’s more, some Eurozone economies are clearly in recession already and should this spread to the entire region, the Fed warns that it anyone’s guess as to how long a recession may last and how much damage it could cause to the American economy.

Bernanke did adopt a more optimistic tone when discussing the efforts U.S. banks have made to reduce European exposure and protect assets. However, Bernanke still cautions that should the Eurozone slide back into recession, the U.S economy and financial system will “still be significantly affected”.

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