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.
Even former perma-bull Larry Kudlow, who was talking about "mustard seeds" months before Bernanke mentioned anything about "green shoots" couldn't put much of a positive spin on the numbers. On Real Clear Politics, Kudlow wrote:
I do the best I can to be optimistic about our nation's future. But realistically, the current picture is not particularly good.
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4 comments:
"Mohamed El-Erian's op/ed in Friday's Financial Times seemed like too-gloomy a piece to link to on the even of a holiday weekend"
Hackensack, we can do better.
You're right, that was sloppy. Fixed it. Thanks for bringing that to my attention.
While I'm revisiting this post, here is a slightly more positive spin on those job numbers from Dr. Mark Perry's Carpe Diem blog. Elsewhere, Dr. Perry notes that the gender gap in unemployment has widened.
33 million now on food stamps. That is 1 in 9 residents of the US. Maybe time to control the border and deport illegals.
Kudlow finally throws in the towel = bear market over?
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