Fed forecasts more misery

MINNEAPOLIS — The economic downturn will continue in 2009 in the Upper Plains, with unemployment rates rising and recovery in the residential real estate market expected to take more than a year, the Federal Reserve Bank of Minneapolis said Wednesday.

“All signs point to declining regional economic activity in 2009,” said Toby Madden, regional economist at the Minneapolis Fed, which covers Minnesota, North Dakota, South Dakota, Montana, northwestern Wisconsin, and Michigan’s Upper Peninsula.

Economists with the Minneapolis Fed said that unemployment rates will rise in the region as a whole, but the jobs market will be worse in the eastern part of the territory.

In Minnesota, the unemployment rate is predicted to rise nearly 1 percentage point to 7 percent by the end of 2009 while in Michigan’s Upper Peninsula, the rate is expected to jump more than a full point to just over 11 percent by the fourth quarter of 2009.

But in Montana and the Dakotas, the employment outlook is better because of strength in the natural resources and agriculture sectors. There the unemployment rates are expected to hold about steady, with a slight decrease in Montana.

The Fed’s outlook is based on both a forecasting model and surveys of business leaders, manufacturers and agricultural lenders. The forecasting model only includes data from the first three quarters of 2008. That means the Fed’s 2009 bleak forecast could actually be optimistic, given that the economic downturn has continued in the past couple months, Madden said.

As jobs are lost and the credit crunch continues, consumer spending will continue to tighten. The Fed reports the outlook for home building and new home sales continues to look grim in 2009.

The outlook will be updated in early February after numbers for the fourth quarter become available, he said.

“Forecasting is not an exact science,” cautioned Rob Grunewald, an associate Fed economist. He noted that job growth in 2008 was weaker than the Fed had forecast the year before.

Madden said the government’s efforts to jump-start the economy make forecasting even harder.

“It is somewhat of a tough time to predict the future with a lot of fiscal, monetary stimulus,” Madden said, adding that the government bailout of mortgage-backed securities aren’t included in the statistical models.

But Madden said the models are made more accurate when combined with the surveys.

In surveys conducted with business leaders as recently as last month, economists said the response was the most pessimistic they’ve seen in the 18 years the poll has been done. Leaders in Minnesota and Wisconsin were more pessimistic than in other states.

On the brighter side, personal income is expected to make gains in 2009 while prices increase less than they did this year, the economists said.

In addition to providing an overall economic outlook, the Minneapolis Fed also presented results from a survey of businesses and financial institutions on the credit crunch.

The results, which are published in the recently released January edition of the Minneapolis Fed’s business and economics newspaper, showed that credit is still available, though the credit environment has changed.

Lenders have tightened credit requirements at the same time that those seeking credit have become less qualified for it, said fedgazette editor Ronald Wirtz.

“Banks are re-evaluating where the new standard is,” Wirtz said. “People looking for credit have to shop around more to find what they need.”

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On the Net:

The Federal Reserve Bank of Minneapolis: http://www.minneapolisfed.org/

Tags: fed, reserve, economy, depression