Just how badly broken is the U.S. economy?

February 4, 2011

This bit on the January jobs report from Bankofamericamerrilllynch worries me:

In the Household Survey, the unemployment rate plunged 0.4ppt for the second month in a row bringing it to 9.0% – the lowest since April 2009. The unemployment rate has not dropped this far, this fast since the 1950s. So, we question whether this decline will be sustained. The household measure of employment rose just 117,000 while the labor force participation rate dropped 0.1 ppt to a fresh cycle low of 64.2%. Never before has such a sharp decline in the unemployment rate been predicated on an ongoing drop in the labor force. The participation rate has crumbled 1.5ppts since the recovery began.

This labor force detachment tell us two things that should give even the most bullish of market participants room for pause: (1) structural unemployment is rising and (2) the potential rate of growth in the U.S. is slowing. Perhaps this is one reason why the Treasury market is selling off sharply in the aftermath of today’s report. More structural unemployment and weak potential growth imply less slack in the economy and raise an inflation risk.

And this chart from ITG Investment Research does not make me feel any better:


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