In the latest Economic Letter from the Federal Reserve Bank of San Francisco, David Lang and Kevin J. Lansing examine recent forecasts produced by business cycle indicators from the Feder Reserve banks of Philadelphia and Chicago.  The authors note that these forecasts suggest unemployment will not abate in the coming year.  Rather, based on the traditional relationship between GDP and jobs, the unemployment rate will likely go up slightly.  

The monthly value of the CFNAI or ADS index at the end of the quarter provides a gauge of recent economic data, whereas the change from the previous quarter indicates whether the data are improving or deteriorating. Given that financial markets are forward looking, the quarterly changes in stock prices and long-term Treasury yields measure the degree to which recent data may have shifted investor expectations about the future. All these variables are statistically significant in helping explain real GDP growth two to four quarters ahead. The two-quarter-ahead forecasting models explain about 50% of the variance of real GDP growth since 1972, while the four-quarter-ahead models explain about 30% of the variance.

Figure 3 plots forecasts from the two-quarter-ahead models versus the two-quarter moving average of real GDP growth from 2007 to 2010. Both forecasts track the actual data fairly well through the first half of 2010, but with a lag, which is typical when current and past data are used to make predictions about the future. For the second half of 2010, the CFNAI model predicts an average growth rate of 1.0%, while the ADS model predicts an average growth rate of 1.9%. The four-quarter-ahead CFNAI model predicts average growth rates through the first half of 2011 of 1.6% and the four-quarter-ahead ADS model predicts 2.2%. By contrast, the most-recent Blue Chip consensus forecast is for 2% growth in the second half of 2010 and 2.3% through the first half of 2011.

Lang and Lansing note that the "conventional wisdom" that recessions are followed by rapid recoveries clearly does not apply to this recession, and that the "Chicago and Philadelphia Fed business cycle indicators predict that real GDP growth through the first half of 2011 will remain at or below potential."  As a result, they are projecting unemployment to rise another 0.5% in 2011.  Read the full article here.