FYI | Nov 13 2009
By Chris Shaw
While some in the market are now forecasting unemployment in the US could hit as high a 12-13% (see US Unemployment Will Get Much Worse, FNArena, 12/11/09) Morgan Stanley continues to take the view the recession in the US labour market will soon be over.
This would be not a moment too soon given unemployment in October was 10.2%, the highest rate since early in 1983, but according to Morgan Stanley the current state of the labour market is nothing more than cyclical weakness, an exaggeration of the traditional early stake surge in productivity that characterises the beginning of every period of expansion.
Its estimates reflect this as Morgan Stanley’s analysis suggests productivity growth is running at around 2% at present, a rate the economists expects will increase to an average of 3.8% over the course of 2009/10. This is an increase of 0.5% from what they had been forecasting last month.
While there appears to be a weaker relationship now between the economy and labour markets, Morgan Stanley continues to expect job growth will begin to emerge in early 2010, one key reason being the job cuts already made have all but eliminated any hiring excesses in the market. This implies with the economy generating annualised growth of 2-3% in recent months, there is now actually a hiring deficit.
Some other economic figures support the Morgan Stanley view, as the economists point out the level of private payrolls at present is about 500,000 below the mid-2003 low points of the previous recession, yet since that time the US economy has grown by almost 11%. Other indicators are also turning positive as temporary help payrolls have increased by 40,000 in the past two months, the largest increase since 2005, while factory regular and overtime hours have risen steadily since the spring.
As well, overall payroll figures for August and September were revised up by 90,000, an unusually large amount, Morgan Stanley noting such upward revisions are often a sign of general improvement. Initial and continued unemployment claims have been trending down since June, and surveys of hiring and hiring plans have also improved in recent weeks.
On Morgan Stanley’s numbers, unemployment in the US is likely to peak at around 10.5% in the first quarter of 2010, which is half a point higher than what the economists had forecast a month ago.
This has some potentially negative implications for growth in that an increase in joblessness usually sees an erosion in credit quality and makes lenders more cautious while also bringing down consumer confidence levels. The counter however is it is likely to prompt policymakers to consider some new measures to create jobs such as a previously mentioned job tax credit.
