Unemployment May Drop to 6% by Mid-2013, N.Y. Fed Study Finds

By Carlos Torres - Mar 28, 2012 10:14 PM GMT+0700

The jobless rate in the U.S. could drop to as low as 6 percent by the first half of 2013, a bigger decrease than most economists currently project, according to research from the Federal Reserve Bank of New York.

The relationship between the number of Americans newly unemployed and those recently finding work indicates joblessness will continue to decline, according to economist Aysegul Sahin. The jobless rate held at a three-year low of 8.3 percent last month after falling by 0.8 percentage point in the year ended January, according to figures from the Labor Department.

“Simulations based on historical patterns suggest that the fall in the unemployment rate could be quicker than many forecasters predict,” Sahin wrote in a note on the bank’s Liberty Street Economics blog co-written by research associate Christina Patterson.

The analysis looked at flows into and out of unemployment since the end of World War II, likening it to water in a bathtub. The unemployment rate, or level of water in the tub, would be determined by the difference in the volume of water pouring in and draining out.

The number of those exiting unemployment, which include people finding a new job as well as those leaving the labor force, takes precedence in determining changes in joblessness at this stage of a recovery, the economists found.

The flow into and out of unemployment over the three prior recoveries indicates the jobless rate will decrease to 6 percent by at least the end of 2014, the economists said. Should the pattern be similar to that following the rebound from the 1990- 91 recession, the rate could get close to there by early next year.

Median Forecast

Unemployment will average 7.6 percent in the last three months of 2013, according to the median forecast of economists surveyed by Blue Chip Economic indicators this month. The average for the 10 lowest estimates was 7 percent.

Fed policy makers predict an unemployment rate of 7.4 percent to 8.1 percent in the fourth quarter of 2013, based on their so-called central tendency forecasts, which exclude the three highest and three lowest of 17 projections.

The study doesn’t make a projection for the unemployment rate in the fourth quarter of this year. The Obama administration’s handling of the economy is a central issue in the Nov. 6 presidential election.

The post on the Fed’s blog said researchers will discuss the importance of flows into and out of the labor force in determining the level of unemployment in a report on March 30.

To contact the reporter on this story: Carlos Torres in Washington at Ctorrres2@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net