Minneapolis Fed President Narayana Kocherlakota also gave his economic outlook today for 2011. Some of the forecasts of some regional bank presidents are looking a lot alike. GDP growth is improving, inflation is still low but gradually firming, and unemployment is high and not likely to ease as rapidly as preferred.
"In my outlook, I'll focus on the three variables of most interest to us at the Federal Open Market Committee (FOMC): real gross domestic product (GDP), unemployment, and inflation. My bottom line is that, from the point of view of the macroeconomy, 2011 will be a better year than 2010."
"In the first three quarters of 2010, real GDP growth averaged 2.7 percent at an annualized rate. We don't have a fourth quarter number yet, but I expect that it will be higher. With that in mind, I expect that real GDP grew at a rate of around 2.8 percent from the fourth quarter of 2009 to the fourth quarter of 2010. If that prediction ends up being right, real GDP will - finally - recover to its level in the fourth quarter of 2007."
"Even with the December changes in fiscal policy, I would say that I expect that real GDP growth will probably be closer to 3 percent than 4 percent in 2011. I still see two major headwinds in the U.S. economy. The first is that many households will continue to strive to rebuild their net worth positions in response to past-and possibly future-falls in residential land prices. As I will explain in more detail later, I believe that the decline in household net worth, precipitated by falls in land values, was a key factor in generating the severity of the Great Recession. It will remain important in the recovery."
"The second headwind is related. Many banks in the United States face ongoing issues with asset quality. For example, the FDIC problem bank list contains over 800 banks. Problem banks are less likely to take the risk of lending to small and/or younger firms and other entrepreneurial activity. Instead, they are more likely to preserve capital ratios by limiting their asset growth and allocating their lending staff to working out loans to existing borrowers."
"Nonetheless, I do not believe that either unemployment or employment will improve rapidly in 2011. Startup businesses and other young firms are a key source of employment growth in the early stages of recoveries. As I've mentioned earlier, they are likely to find bank financing more challenging to obtain than usual. As well, 4.2 percent of the labor force has been unemployed for longer than six months. Historically, this group of workers has a low job-finding rate."
"The central tendency of the November FOMC forecasts is that unemployment will remain above 9 percent throughout 2011. I would agree with those forecasts. Even more troublingly, I expect too that unemployment is likely to be higher than 8 percent as late as the end of 2012."
"With that said, I'm optimistic that inflation will actually turn north in 2011. Our Minneapolis Fed forecasting model predicts that, by the end of 2011, inflation will be between 1.5 and 2 percent."