Unemployment a leading indicator?

July 6, 2009

No, says economist Mike Darda of MKM Partners:

At no time in history — from the deflationary wipeout of the 1930s to the inflationary recessions of the 1970s and early 1980s, to the balance sheet downturn of 1990-1991, to the bursting equity bubble and the 2001 recession — was the labor market or the unemployment rate a leading indicator of either the business cycle or stock market trends.

My spin: Unless, of course, the jobless rate is a leading indicator of a double-dip recession.

2 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Mohammad El Erian takes the opposite side of Darda’s argument in a recent FT commentary. “America’s Jobs Data is Worse Than We Think”

<>

Here’s another way of looking at the situation. From RealClear Markets. “Get Ready For 14% Unemployment” — Louis Woodhull. He makes the case for the link between Government deficits and unemployment. The key factor is the negative effect of deficits on Private Business Investment (PBI).

http://www.realclearmarkets.com/articles  /2009/07/06/get_ready_for_14_percent_un employment_97295.html

<>

Posted by Siobhan Sack | Report as abusive

Mohammad El Erian takes the opposite side of Darda’s argument in a recent FT commentary. “America’s Jobs Data is Worse Than We Think”

“….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. ”

Here’s another way of looking at the situation. From RealClear Markets. “Get Ready For 14% Unemployment” — Louis Woodhull. He makes the case for the link between Government deficits and unemployment. The key factor is the negative effect of deficits on Private Business Investment (PBI).

http://www.realclearmarkets.com/articles  /2009/07/06/get_ready_for_14_percent_un employment_97295.html

“…Here’s why. Because a lot of PBI goes toward offsetting depreciation and increasing productivity, it takes a 5% year-over-year increase in PBI to produce a 1% increase in the number of jobs. Correspondingly, a 5% decrease in PBI will yield a 1% reduction in total employment.

The unemployment rate a year ago was 5.5%. Because the potential labor force is growing, we need employment to increase by 1% annually to keep the unemployment rate from going up. The 37.9% investment decline reported by the BEA can be expected to eventually produce a reduction in total employment of about 8.5%. Accordingly, we can expect unemployment to rise to about 14% within a year unless the downward slide of PBI is reversed………………………………….

While doing nothing to boost demand, Obama’s “stimulus” will depress PBI, and therefore employment. This is because the “stimulus” plan requires selling an additional $787 billion in government bonds. The money to buy these bonds will have to come from somewhere, and much of it will come from people who would otherwise invest in starting or expanding businesses. Indeed, the bonds will have to be priced so that this risk-free investment is more attractive to investors than their other alternatives.

In the fourth quarter of 2008, the Federal government ran a deficit of $303 billion (and therefore had to sell $303 billion of new bonds) and business investment fell by 21.7%. In the first quarter of 2009, the Federal deficit was $650 billion and business investment fell by 37.3%. The economy is being forced to invest in Barack’s Bailout Bonds rather than in businesses that create jobs.

Virtually everything the Obama administration wants to do will have the effect of increasing unemployment. As bad as joblessness is now, be prepared for it to get much, much worse.”

Posted by Siobhan Sack | Report as abusive