Friday, November 06, 2009

Measured Unemployment Tops 10%!

This morning's official government unemployment figure finally topped 10%, coming in at 10.2%.

In pre-market activity, the S&P500 Index futures plummeted. However, at this point, 10:30AM, they have rebounded, then fallen again through yesterday's closing values.

Of course, the usual pundits weighed in on CNBC about how unemployment lags a recovery, blah, blah, blah, blah.

Even Brian Wesbury, usually quite sanguine, was beating a 'glass half full' drum, predicting a peak unemployment number in only two more months.

However, in this morning's Wall Street Journal, Mark Gongloff notes,

"In the eight recessions between World War II and 1982, payrolls bottomed and unemployment peaked, on average, less than one and two months, respectively, after the recessions ended.

Assuming, as most economists do, that the latest recession technically ended in June 2009, this recovery already is looking jobless."

I wrote this post in early September. In it, I suggested that the US economy has changed pretty significantly since that 1982 recession, now almost thirty years ago. I compared this to the difference in the US economy between 1930 and 1960.

To me, the fact that Gongloff reports that the unemployment peaking behavior has been different since the 1982 recession indicates that this phenomenon may just not exist any longer. Businesses are run differently, with much more timely data and inventory control systems. Linkages between manufacturers, distributors and retails are tighter and more seamless.

In any case, Gongloff's point is well taken. He reports that,

"Economists, on average, expect unemployment to peak in February 2010- eight months after the recession's assumed end.

Even that forecast might be optimistic......

At that pace, given the historical relationship between payrolls and GDP, payrolls would fall through the second quarter of 2010, according to University of Wisconsin economist Menzie Chinn. And unemployment typically peaks after payrolls bottom."

One thing is pretty certain. Given the Fed's recent denial of the effects of so much monetary base creation on the inflation rate, this unemployment number will give it an excuse to keep rates around zero.

Some have opined that this will be great for corporate profits. Well, perhaps for banks, in that they can literally get free money and invest it in Treasuries at a positive spread.

But for most companies, rates affect borrowing. If consumer spending isn't healthy, expansion is moot, and so will be borrowing.

Despite the pundit on CNBC who foresees a "business-led recovery," that simply doesn't make sense. Yesterday's reported 10%+ productivity increase means that today's businesses can pump out quite a bit of volume without adding labor.

So much for Say's Law in the modern US economy.


dex said...

It is possible that government spending will lead to growth in GDP and fight unemployment. The government potentially could run massive deficits to prevent unemployment from increasing or even reduce it. It might even be possible to finance this because treasuries are a relatively low percentage of household, pension, insurance company, and bank assets, and if holdings increased, that could finance federal deficits even if foreign financing fell off due to the US running smaller trade deficits. Deficit spending and JGB accumulation went on for quite some time in Japan.

Obviously, this does not lead to strong economic growth. But then, if the government insists on mostly bailing out creditors of the big troubled financials, instead forcing them to take haircuts in the usual bankruptcy or receivership process, then the economy has to grow slowly due to the burden of paying off the bad debt.

C Neul said...

Sorry Dex, but I find this comment to be largely gibberish and, what I can understand, simply wrong.