by Calculated Risk on 1/09/2013 03:13:00 PM

Earlier I posted some questions for this year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Note: Here is a review of my 2012 Forecasts

4) Unemployment Rate: The unemployment rate is still elevated at 7.7% in November [7.8% in the December report]. For the last two years I've been too pessimistic on the unemployment rate because I was expecting some minor bounce back in the participation rate. Instead the participation rate continued to decline.

Maybe 2013 will be the year the participation rate increases a little, or at least stabilizes. Economists at the SF Fed wrote about this last [month]: Will the Jobless Rate Drop Take a Break?

The recent recession was unusual in its depth and its duration. Labor market conditions have remained difficult for a long time. As a result, large numbers of discouraged workers have stopped looking for jobs. A big unknown is whether these workers will stay out of the labor force permanently or enter as the economy recovers. If these workers join the labor force, increasing participation could have a major impact on the unemployment rate in the coming years.

What will the unemployment rate be in December 2013?

Forecasting the unemployment rate includes forecasts for economic and payroll growth, and also for changes in the participation rate. Note: The participation rate is the percent of the working age population (16 and over) that is in the labor force.

We can be pretty certain that the participation rate will decline over the next couple of decades based on demographic trends, but it is unclear what will happen in 2013. The participation rate could bounce back (increase), as the Fed paper excerpted above suggests. Or the participation rate could decline further as has happened over the last few years

Here is a table showing the participation and unemployment rates for December since 2008.

Unemployment and Participation Rate for December each Year
December of	Participation Rate	Unemployment Rate	Using December 2010 participation rate1
2008	65.8%	7.3%
2009	64.6%	9.9%
2010	64.3%	9.3%
2011	64.0%	8.5%	8.9%
2012	63.6%	7.8%	8.8%
1This is the estimated unemployment rate assuming the participation rate had stayed at the December 2010 level of 64.3%, and all of the additional participants were unemployed (same employment growth).

The last column shows what would have happened to the unemployment rate if the participation rate had held steady for the last two years. Clearly the declining participation rate played a key role in the decline in the unemployment rate.

I could make an argument for some bounce back in the participation rate (see Fed paper above), and then, with sluggish growth, we'd probably see an increase in the unemployment rate in 2013 to over 8%. However - as we've seen over the last couple of years - sluggish growth probably isn't sufficient to draw many people back into the labor force, and I could make an argument for another decrease in the participation rate.

My guess is the participation rate will remain around 63.6% in 2013, and with sluggish employment growth, the unemployment rate will be in the mid-to-high 7% range in December 2013 (little changed from the current rate).

Here are the ten questions for 2013 and a few predictions:
• Question #1 for 2013: US Fiscal Policy
• Question #2 for 2013: Will the U.S. economy grow in 2013?
• Question #3 for 2013: How many payroll jobs will be added in 2013?
• Question #4 for 2013: What will the unemployment rate be in December 2013?
• Question #5 for 2013: Will the inflation rate rise or fall in 2013?
• Question #6 for 2013: What will happen with Monetary Policy and QE3?
• Question #7 for 2013: What will happen with house prices in 2013?
• Question #8 for 2013: Will Housing inventory bottom in 2013?
• Question #9 for 2013: How much will Residential Investment increase?
• Question #10 for 2013: Europe and the Euro