Rosenberg: Unemployment headed to 12-13%….

November 11, 2009

…but that doesn’t mean the overall employment picture will get a lot worse.

From today’s “Breakfast with Dave” e-mail:

There are serious structural issues undermining the U.S. labour market as companies continue to adjust their order books, production schedules and staffing requirements to a semi-permanently impaired credit backdrop. The bottom line is that the level of credit per unit of GDP is going to be much, much lower in the future than has been the case in the last two decades. While we may be getting close to a bottom in terms of employment, the jobless rate is very likely going to be climbing much further in the future due to the secular dynamics within the labour market.

But in a nutshell, to be calling for a 12.0-13.0% unemployment rate is meaningless except that it is very likely going to be a headline grabber. The most inclusive definition of them all, the U6 measure of the unemployment rate, which includes all forms of unemployed and underemployed, is already at 17.5%. The posted U3 jobless rate that everyone focuses on is at 10.2% (though if it weren’t for the drop in the labour force participation rate, to 65.1% from 66.0% a year ago, the unemployment rate would be testing the post-WWII high of 10.8% right now). The gap between the U6 and the official U3 rate is at a record 7.3 percentage points. Normally this spread is between 3-4 percentage points and ultimately we will see a reversion to the mean, to some unhappy middle where the U6 may be closer to 15.0-16.0% and the posted jobless rate closer to 12%. This will undoubtedly be a major political issue, especially in the context of a mid-term elections and the GOP starting to gain some electoral ground.

Think about it. We haven’t yet hit bottom on employment but that will happen at some point. Employment is not going to zero, of that we can assure you. But when we do start to see the economic clouds part in a more decisive fashion, what are employers likely to do first? Well, naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began.

So the business sector has a vast pool of resources to draw from before they start tapping into the ranks of the unemployed or the typical 100,000-125,000 new entrants into the labour force when the economy turns the corner. Hence the unemployment rate is going to very likely be making new highs long after the recession is over — perhaps even years.

This last bit explains why the cyclical pressures on inflation are likely to stay low for some time. But wage-push isn’t the kind of inflation we need to be worried about.

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Its not just the number of unemployed but the number who will burn their unemployment insurance. I saw an analysis of the recently signed extension program and it appears very few will be eligible for the full 20 week extension even in high unemployment states like California. It has to do with the structure of the previous extension programs.

We could have lots of desperate people by next summer.

Posted by sangellone | Report as abusive

It seems to me that there are forces at work artificially aiding the stock market in this current rise. As I talk to my daughter (a banker at Wells Fargo) the stories of forclusures are not abaiting. My son (a private stock broker) attempts to comfort me, but is worried regarding the low dollar–which is why I think the stock market appears to be on the rise. I am 52 years old and I cannot remember a time when so many of my contemporaries have been out of work. I have an attorney friend that cannot finance a commercial building that he recently finished (and he has good credit). My point is that this rollercoaster is coasting and it can only coast downhill. I don’t believe that anyone in congress can really believe that when we hit bottom how low it will be. U3 or U6…it won’t matter.

Posted by Gerald Dietz | Report as abusive