In yet another sobering acknowledgment that jobs will continue to remain scarce despite the seemingly improving economic situation, Federal Reserve officials believe that unemployment levels will "remain elevated for quite some time," according to minutes released Wednesday of a recent Fed meeting.
"Participants expected the economic recovery to continue, but, consistent with experience following previous financial crises, most anticipated that the pickup in output and employment growth would be rather slow relative to past recoveries from deep recessions," the December 15-16 meeting minutes from the Federal Open Market Committee show. The committee is the Fed's policy-making body.
The group noted several positive developments in the economy, including increased industrial production and consumer spending, but "participants noted several factors that likely would continue to restrain the expansion in economic activity." Specifically, "business contacts again emphasized they would be cautious in adding to payrolls and capital spending, even as demand for their products increases." Translation: even more sales won't necessarily translate into more hiring.
The weakness in labor markets continued to be an important concern to meeting participants, who generally expected unemployment to remain elevated for quite some time. The unemployment rate was not the only indicator pointing to substantial slack in labor markets: The employment-to-population ratio had fallen to a 25-year low, and aggregate hours of production workers had dropped more than during the 1981-82 recession.
Although the November employment report was considerably better than anticipated, several participants observed that more than one good report would be needed to provide convincing evidence of recovery in the labor market.
Participants also "remained concerned about the economy's ability to generate a self-sustaining recovery without government support.
"In particular, they noted the risk that improvements in the housing sector might be undercut next year as the Federal Reserve's purchases of [mortgage-backed securities] wind down, the homebuyer tax credits expire, and foreclosures and distress sales continue." The Fed has committed to buying at least $1.25 trillion of mortgage-backed securities.
And don't count on bank lending to drag the economy out of the doldrums. Per the minutes:
Bank loans, however, continued to contract sharply in all categories, reflecting lack of demand, deterioration in potential borrowers' credit quality, uncertainty about the economic outlook, and banks' concerns about their own capital positions. With rising levels of nonperforming loans expected to be a continuing source of stress, and with many regional and small banks vulnerable to the deteriorating performance of [commercial real estate] loans, bank lending terms and standards were seen as likely to remain tight.
Small businesses will continue to suffer.
Participants again noted the contrast between large and small firms' access to financing. Large firms that can issue debt in the markets appeared to have relatively little difficulty obtaining credit. In contrast, smaller firms, which tend to be more dependent on commercial banks for financing, reportedly faced substantial constraints in gaining access to credit.
While survey evidence suggested that small businesses considered weak demand to be a larger problem than access to credit, participants saw limited credit availability as a potential constraint on future investment and hiring by small businesses, which normally are a significant source of employment growth in recoveries.
READ the full minutes below: