US Unemployment Tops 10%

I just want to thank Valichka and Siri for inviting me to contribute and everyone else for their great posts and comments.

One of the bits of news coming out of the USA that has made a big splash here is the Labor Department figure of 10.2% unemployment released at the end of last week.

Double-digit unemployment is a psychological tip off for many Americans that things are really bad. The highest jobless rate in 26 years is tough for Americans not used to the slightly higher numbers associated with the more regulated or socially organized economies. Many economists estimated the natural rate of unemployment here to be around 5% since the mid 1990s, leaving a little over 5% to be cyclically related.

The ‘grim milestone’ as it was termed by the Wall Street Journal may be final wound inflicted by an American recession that has stubbornly refused to wane. Or it could be a sign that the recover is faltering. While numbers from the Bureau of Labor Statistics recently reported 3^rd quarter growth at an annualized 3.5%, the pain of unemployment is being felt by over 15.7 million Americans with many more forced to take part-time or otherwise unfavorable unemployment.

Ways Out

The Obama administration whose polls on the economy have been steadily declining over his first year in office said they were considering tax cuts for businesses, and increased infrastructure expenditures and energy efficiency investments.

American Equity markets are in the midst of a strong rally. The Dow Jones Industrial Average has climbed back above 10,000. What is driving this exuberance in equities? What is the market seeing that is leading to this optimism?

Some ideas have been famously borrowed from German. The first is of course “Cash for Clunkers” which is nothing more than a poorly executed Abwrackprämie. I’ve heard a number of other commentators mention the Kurzarbeit system, which prevents people from becoming unemployed for too long and thus loosing skills. Currently 1 out of every 3 unemployed have been so for over 6 months. The highest toll in that column since World War II. Any other great ideas we have from Europe or anywhere else we might make use of?

Other Concerns

While equity markets can be considered a leading economic indicator, which mercifully points up at the moment, the steadily increasing price of gold and related inflationary fears is causing some to worry. What is the cause of this gold rally? As equities climb, its less likely investors are looking for a safe haven and more likely they are hedging against inflation.

Economists have long examined the key macroeconomic trade-off of inflation and or more specifically the output ratio. (Okun’s Law describes this trade off is anyone is trying to dig a little deeper) This would state that with such low GDP growth and high unemployment there should be no cause to fear inflation.

However, a weakening dollar increases the cost of goods abroad. The huge Federal deficit being run, and continued easy monetary policy are causing many to fear a large inflationary bubble in the medium term. (This implies the delicate question of how much stimulus and easy money is enough, which would be a good topic for another post.)

I heard a commentator on the Kudlow Report, a market news/discussion show; mention how slow velocity is- great point a lot of people forget about. If we all remember our macroeconomics courses:

m^s + v = p + y

m^s – growth rate of the money supply

v - velocity (how fast a unit of money is spent)

p – inflation rate

y- real GDP growth rate

If the velocity of money is slowing down in a recession how does that conflict with the Quantity Theory of Money?

Sum Up

My diagnosis of the US economy is an optimistic one. We will see further job loss, but job gains lag behind economic recoveries, and we will see that eventually. Illustrated here by the Mikeroeconomics BLog: http://mikeroeconomics.blogspot.com/2009/01/gdp-vs-unemployment-rate.html

Love to here your responses to these issues.

-Michael Meehan