FYI | Nov 12 2009
By Andrew Nelson
For months we’ve been hearing that the neighbourhood of 10% would be the US unemployment peak and once employment in the world’s biggest economy turned, we’d all be able to get on with business of a sustained recovery. However, this increasingly key read flew past that mark last week, months earlier than expected, and yet the outlook for US jobs continues to worsen.
David Rosenberg, chief economist and strategist for Canadian wealth management firm Gluskin Sheff, predicts that the US unemployment will likely hit 12-13% before it starts to improve. Although, he sees the headline number as being fairly meaningless apart from it being a “headline grabber”.
The most inclusive definition of US unemployment, the U6 measure, which includes all forms of unemployed and underemployed, is already at 17.5%. The U3 jobless rate, the one that everyone focuses on, is at 10.2%. this means the gap between the U6 and the official U3 rate is at a record 7.3 percentage points. Normally, points out Rosenberg, this spread is between 3-4 percentage points. And we haven’t seen the bottom yet by a long shot.
Even when we do start to see the economic environment begin to improve in a meaningful manner, the first move by employers will likely be to bring the work week back to pre-recession levels. All up, the work week was cut from 33.8 hours to a record low 33.0 hours. Rosenberg notes that the labour input equivalent is another 2.4 million jobs lost. So when you count in hours, it’s as if over 10 million jobs were lost this cycle.
Next, employers will need to soak up the record number of people who were pushed into part-time work. They total over nine million, and these people are not counted as unemployed. Thus, bringing them back into the full-time workforce wont even make a dent on the headline rate.
So with the business sector still sitting atop a vast pool of resources to draw from before they even begin to start hiring the unemployed and the 100,000-125,000 new entrants that tend to enter the labour force when the economy turns the corner, Rosenberg thinks it is very likely the US unemployment rate will continue to post new highs well after the recession is over. This could play out for years, he thinks.
Looking at the last two US recessions that ended in November 2001 and March 1991, he notes that unemployment didn’t actually peak until June 2003 and June 1992 respectively. In both instances, the unemployment rate peaked well more than a year after the recession technically ended. And these were minor hiccups compared to what has been going though now.
The 2001 recession was caused by a tech stock collapse and the 1991 cycle was due to the Savings & Loan debacle. However, this current downturn was brought about by asset deflation and a credit collapse of historical proportions. Beware the economist that thinks unemployment rate is in the process of cresting, warns Rosenberg.
“Just remember it is the same consensus community that predicted at the beginning of 2008 that the jobless rate would peak out below 6% this cycle.”
Apart from the historical perspective, Rosenberg notes there are still some serious structural issues affecting the US labour market that as yet remain un-addressed. The biggest is that companies are continuing to adjust their order books, production schedules and staffing requirements to fit in with the new and probably permanently impaired credit backdrop. Thus, the level of credit per unit of GDP is going to be significantly lower in the future than it has been over the last two decades.
How, wonders Rosenberg, can Washington promote consumer spending at a time when the consumption/GDP ratio is at a record high of 71% and well above the long-term norm of 64%?
He also questions the wisdom of pushing for credit creation at a time when household debt/income ratio is at 125%, which is near the all-time high and twice the historical norm.
Lastly, how successful, wonders Rosenberg, can Washington be in trying to push for even higher home ownership rates, when the current 67.4% level is just about the highest in the world and still well above the historical norm of 64%.
This grim outlook is especially being reflected across the US small business sector, the nation’s largest employer. The National Federation of Independent Business (NFIB) small business optimism index is sitting well down in contractionary levels. Private payrolls continue to decline and GDP excluding government support is “stagnant at best”, points out Rosenberg.
More specifically, the labour components of the small businesses survey are also un-optimistic, he notes, with hiring intentions remaining in negative terrain, as they have been since the Lehman collapse.
While these small business data seem to be at odds with the upbeat profit data coming out of the S&P 500, Rosenberg points out that there are two different entirely universes. The small business index’s profit improvement index remains at “abysmal” levels, notes Rosenberg, who also points out that the number of businesses reporting higher sales actually worsened to a three-month low in September. What was the biggest worry noted in the survey? It was “poor sales” by a country mile. 33% of respondents labelled this as their biggest worry, which tied the all time high.
So even if the US is getting close to a bottom in terms of overall employment, Rosenberg still sees the actual number as being fairly meaningless. The real problem is that when these people do eventually get back to work, they simply wont have the means to begin spending like they once did.
