Financial Times: American jobs data are far worse than we think

Discussion in 'Data Sets and Feeds' started by ByLoSellHi, Jul 2, 2009.


    American jobs data are worse than we think

    By Mohamed El-Erian

    Published: July 2 2009 16:16 | Last updated: July 2 2009 16:16

    What if the US unemployment rate rises above 10 per cent and stays there for an extended period? This is a question that is not being asked enough, even though it entails yet another historical anomaly that will further complicate policy formulation and open it up to greater political interference.

    The unemployment rate is traditionally characterised as a lagging indicator and, as such, is viewed as having limited predictive power. After all, unemployment is a reflection of decisions taken earlier in the cycle so the rate always lags behind the realities on the ground – or so says conventional wisdom.

    This conventional wisdom is valid most, but not all of the time. There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviours and outlooks.

    Today’s broader interpretation is warranted by two factors: the speed and extent of the recent rise in the unemployment rate; and, the likelihood that it will persist at high levels for a prolonged period of time. As a result, the unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system.

    In just 16 months, the US unemployment rate has doubled from 4.8 per cent to 9.5 per cent, a remarkable surge by virtually any modern-day metric. It is also likely that the 9.5 per cent rate understates the extent to which labour market conditions are deteriorating. Just witness the increasing number of companies asking employees to take unpaid leave. Meanwhile, after several years of decline, the labour participation rate has started to edge higher as people postpone their retirements and as challenging family finances force second earners to enter the job market.

    Notwithstanding its recent surge, the unemployment rate is likely to rise even further, reaching 10 per cent by the end of this year and potentially going beyond that. Indeed, the rate may not peak until 2010, in the 10.5-11 per cent range; and it will likely stay there for a while given the lacklustre shift from inventory rebuilding to consumption, investment and exports.

    Beyond the public sector hiring spree fuelled by the fiscal stimulus package, the post-bubble US economy faces considerable headwinds to sustainable job creation. It takes time to restructure an economy that became over-dependent on finance and leverage. Meanwhile, companies will use this period to shed less productive workers. This will disrupt consumption already reeling from a large negative wealth shock due to the precipitous decline in house prices. Consumption will be further undermined by uncertainties about wages.

    This possibility of a very high and persistent unemployment rate is not, as yet, part of the mainstream deliberations. Instead, the persistent domination of a “mean reversion” mindset leads to excessive optimism regarding how quickly the rate will max out, and how fast it converges back to the 5 per cent level for the Nairu (non-accelerating inflation rate of unemployment).

    The US faces a material probability of both a higher Nairu (in the 7 per cent range) and, relative to recent history, a much slower convergence of the actual unemployment rate to this new level. This paradigm shift will complicate an already complex challenge facing policymakers. They will have to recalibrate fiscal and monetary stimulus to recognise the fact that “temporary and targeted” stimulus will be less potent than anticipated. But the inclination to increase the dose of stimulus will be tempered by the fact that, as the fiscal picture deteriorates rapidly, the economy is less able to rely on future growth to counter the risk of a debt trap.

    Politics will add to the policy complications. The combination of stubbornly high unemployment and growing government debt will not play well. The rest of the world should also worry. Persistently high unemployment fuels protectionist tendencies. Think of this as yet another illustration of the fact that the US economy is on a bumpy journey to a new normal. The longer this reality is denied, the greater will be the cost to society of restoring economic stability.

    The writer is chief executive and co-chief investment officer of Pimco. His book, When Markets Collide, won the 2008 FT/Goldman Sachs Business Book of the Year
  2. Daal


    He is right. In fact is possible that Japan's downturn both was made worse by a declining population but also FUELED further declines in population as people got less optimistic about having large families. A high persistent unemployment rate could have an unpredictable impact
  3. Illum


    "There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator"

    Wow, took the so called "brains" on wall street until now to say what we have been saying for months now. Jobs number, is "the" number movin the market now, in real time.
  4. pookie

    pookie must have been a tough one to figure out.
  5. Cutten


    IMO unemployment will get into the mid teens, and it could stay there for a year or two, maybe more (depending on the response). In places like the Baltic states I could imagine it hitting 25% at the peak.

    El-Arian is potentially behind the curve on this. The question is not whether unemployment will stay above 10% for a while, but whether it will reach 15-20%, and stay there for a few years. Another pertinent question is whether this will cause major tax hikes that massively reduce long-term prosperity and growth. Another salient question is whether both of those combined will cause street riots or the collapse of governments, maybe even a war or two.

    Mohammed needs to get with the program.
  6. aegis


    True. Just another 5-10% more to go.
  7. Daal, that's a really good & important point. While right now the US birth rate is about at its replacement rate, further economic pain will undoubtedly push the birthrate lower as parents ration scarce resources into fewer children. And forget about assimilation of illegals - boatloads have already left & aren't coming back. We could be in spain's shoes by 2025.
  8. U-6: Total unemployed, plus all marginally attached workers, plus
    total employed part time for economic reasons, as a percent of
    the civilian labor force plus all marginally attached workers: June 2009: 16.8%
  9. ehorn



    "The SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated "discouraged workers" defined away during the Clinton Administration added to the existing BLS estimates of level U-6 unemployment."
  10. Arnie


    Not only that, but look at the percent that work and don't produce anything.........government. And it's growing.
    #10     Jul 5, 2009