Nov. 6 (Bloomberg) -- Eaton Vance Corp.’s Robert MacIntosh, who predicted a year ago that U.S. unemployment would hit 10 percent this quarter, bet that the municipal-bond market turmoil he was witnessing would “snowball” into a deep recession.

MacIntosh, 52, is co-director of municipal investments as well as chief economist for the Boston mutual-fund company. He last year saw banks cutting lending to hedge funds investing in the tax-exempt bonds, and judged corporate borrowing more broadly would stall and undermine the economy. Now, he sees a 2010 recovery pulling the jobless rate below 9 percent.

The insights last year helped make MacIntosh the only one of 55 respondents in Bloomberg News’s November 2008 monthly survey to project a 10 percent jobless rate in the fourth quarter of 2009, compared with a median estimate of 7.7 percent. The rate exceeded 10 percent last month for the first time since 1983, a report today showed.

“I knew I was kind of hanging out there” with the forecast, MacIntosh said in a telephone interview from his 10th- floor office in Boston’s financial district. “With the liquidity issues that I was living day-to-day in our portfolios a year ago, and the anecdotal evidence that I was feeling about our economy locally, I felt like this recession was going to be worse than the more recent ones.”

Rate to Fall

Now, the labor market is about to move in the other direction, MacIntosh said, because companies will need to increase production to replenish inventories. The jobless rate, which the Labor Department said reached 10.2 percent in October, will probably peak at about 10.5 percent in January and fall below 9 percent by the end of next year, he said.

“I just keep looking at these inventory numbers,” he said. “I know there are much more-sophisticated inventory- control systems now. But the last thing a proprietor wants is to have a customer walk in the door and say, ‘I want one of those,’ and you don’t have one of those on the shelf.”

Municipal hedge funds’ strategies included bets based on the assumption that taxable Treasuries and tax-exempt bonds typically move in the same direction. That approach suffered when investors shunned all except the safest U.S. government- backed assets.

Hedge funds and mutual funds that needed to raise cash to meet margin calls or investor withdrawals struggled to find buyers for their holdings last year, helping to send the Merrill Lynch Municipal Master Index to a 4 percent loss in 2008, including reinvested interest. That was the worst performance since 1999.

‘Tremendous Pullback’

“It hit me how much leverage was in the muni market,” MacIntosh said. He figured the issues in municipal bonds “would just cause a liquidity problem and ultimately a tremendous pullback in companies being able to borrow.”

From that, “the snowball would happen,” as companies fired workers, depressing consumer spending and causing a cycle of lower production and further payroll cuts, he said.

The failure of Lehman Brothers Holdings Inc. in September 2008 triggered approval of a $700 billion financial-rescue program by Congress, while the Federal Reserve started unprecedented backstops for corporate-debt markets and later cut interest rates to almost zero in December. At the same time, most economists and Fed officials forecast that the jobless rate would remain near 7 percent throughout 2009.

Forecasting Loner

As late as February, MacIntosh was still the only economist in the survey to project a 10 percent unemployment rate.

MacIntosh grew up in Quincy, Massachusetts, south of Boston, the son of a factory purchasing-agent father and homemaker mother. As a Harvard University undergraduate, he abandoned plans to major in chemistry after taking an introductory economics class. He got to know the banking industry working as an examiner for the state after Harvard.

After attending Dartmouth College’s Tuck School of Business, he joined Fidelity Investments as a municipal-bond analyst, working there from 1983 to 1991, before joining Eaton Vance, a firm that was founded in 1924.

This year, MacIntosh’s Eaton Vance New Jersey Municipal Income Trust has benefited from the resurgence in demand for state and local debt. The closed-end fund has returned 90.6 percent in 2009, outperforming 96 percent of its peers, according to data compiled by Bloomberg.

He isn’t crowing about his forecasting accuracy, given the grimness of the U.S. economic milestone.

“It’s not something I’m happy about,” MacIntosh said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

Last Updated: November 6, 2009 15:03 EST