Jobless Rate to Hit 10.5%, Keeping Fed in Box: Poll

Unemployment in the United States will shoot to 10.5 percent by the middle of next year, constraining the Federal Reserve's ability to raise interest rates, according to economists surveyed by Reuters.

The survey's findings, drawn from a sample of around 50 economists across the U.S. and Europe, come on the heels of a government report on Friday showing that the nation's jobless rate jumped to a 26-1/2-year high of 10.2 percent in October.

Stubbornly high unemployment has raised fears that the economy's recovery from the most brutal recession since the 1930s may be accompanied by little job creation and slow down the growth momentum next year.

If the unemployment rate rises to 10.5 percent as predicted in the survey, it will be just shy of the 10.8 percent peak during the 1982 recession, which was the highest since 1948.

In the previous poll, economists were expecting the jobless rate to top 10.1 percent by the first quarter of 2010.

With the unemployment rate yet to peak, the survey predicted the Federal Reserve would not start raising interest rates before the third quarter of next year. That was unchanged from the findings of October's poll.

The U.S. central bank last week held overnight interest rate close to zero and said it expected to keep them low for an "extended period."

Growth to Slow

"Historically the Fed has not started hiking until 12 to 18 months after the peak in the unemployment rate. The outlook for the beginning part of next year in terms of growth is still very uncertain and for all for next year," said Zach Pandl, an economist at Nomura Securities International in New York.

Economic growth in the fourth quarter was forecast to slow somewhat from July-September's brisk pace, in part due to sluggish consumer spending as a result of the high unemployment.

The U.S. economy grew at a 3.5 percent annual rate in the third quarter, largely driven by government stimulus programs—including the "cash for clunkers" program—and breaking four straight quarters of decline.

Even with the expected pull back in gross domestic product (GDP) growth as some of the impetus from the auto incentives fades, economists saw only a 20 percent chance of a double-dip recession—a scenario where the economy perks up temporarily only to contract again.

"The double-dip scenario is based largely on policy mistakes—either more fiscal stimulus is needed but unavailable, or the Fed raises short-term interest rates too soon," said Scott Brown chief economist at Raymond James & Associates in Petersburg, Fla.

"The drop off in fiscal stimulus will be a drag on GDP growth later next year, but the Fed should remain accommodative."

The survey forecast real GDP growing at an annualized rate of 3.0 percent in the fourth quarter, moderating to 2.5 percent in the first three months of 2010. In October GDP was seen at 2.4 percent in the October-December period and 2.3 percent in the first quarter.

Economists expect the rebuilding of inventories, which have been drawn down to record lows to meet sluggish demand, to support growth in the coming quarters. Some warned that troubles in the commercial real estate market posed a risk to growth prospects.

"Rising vacancies undermine spending on structures while low utilization restricts capital spending on expansion," said Morgan Keegan's Donald Ratajczak.

"When the inventories are right-sized, the economy will need some wealth appreciation and certainly real income to sustain growth. I think that will eventually happen."

Given the economic slack, inflation pressures were expected to remain muted, buying the Fed more time before withdrawing the support it is lending the economy.

The survey forecast the core consumer price index, excluding food and energy costs, would average 1.7 percent in 2009 and brake sharply to 1.2 percent in 2010.

The core inflation measure, which strips out food and energy prices and is favored by policymakers, had been expected to average 1.6 percent this year and 1.3 percent in 2010 when the same economists were polled last month.

• Slideshow: Where the Jobs Are