Newer versions of Photoshop contain text on a path capability,
older versions of Photoshop Elements do not have this feature.
I have PSE 6 and I found this really easy way to create circular text.
The secret is using the Polar Coordinates feature!
(NOTE: Circular text created with this method will be half the size that you started working with. For example, if your want is a 3 inch circle … you’ll want to start out with a 6 inch by 6 inch canvas.)
1. From the File menu, point to New, and select Blank File.
2. Enter the following values:
Width: 6 inches
Height: 6 inches
Resolution: 300 pixels/inch
Color Mode: RGB Color
Background Contents: Transparent
3. From the View menu, select Grid to activate the grid. This will help you determine the exact vertical center of the canvas … which is where you want to type the line of text.
4. Select the Text tool. Choose a font and set the font size. I am using Arabic Typesetting at 22 pts.
5. Type a line of text that fits from side to side of the canvas as shown below.
6. From the Image menu, point to Rotate and select Layer 180. This makes the text on the top of the circle right-side up when created.
To keep the text from stretching out of shape when formed into a circle we need to adjust the height of the letters.
7. Press CTRL+T to access the Free Transform tool and look to the Options bar at the top of the screen.
To prevent the width from changing along with the height, uncheck the box next to Constrain Proportions and enter a value of 250% for Height. (Width should stay at 100%)
8. PSE will not allow you to apply a filter to a text layer. In the Layers panel, right click the text layer and choose Simplify Layer from the pop up menu.
9. From the Filter menu, point to Distort and select Polar Coordinates.
10. Check Rectangular to Polar in the dialog box that appears and click OK to commit the change.
You now have circular text.