Transcript 455: Forecast: Unemployment (with charts included)

Listen to this episode

Employment growth and the real rate of unemployment are not only key economic indicators. They are the measure of the economy. All the other numbers, including GDP growth and the other indices, are secondary. Labor is the primary capacity that must be used to its maximum. A full employment economy is the only healthy economy.

This is intuitively understood. People do not believe that the GDP upticks and stock market growth mean health. They know from looking out the window that things are not good. The statistic that most matches their mood is the unemployment rate. And now that statistic indicates that the bleeding continues, the malaise worsens, that the dead weight drags down demand.

The chart we include from Calculated Risk displays the huge crater of the depression in employment in which we now find ourselves, now on 42 months. This chasm swallows all other post-war recessions combined. Unemployment here is the weakness and fragility that resonates with the feelings of the real person in the real economy. The only reason other recessions are visually close to the current line in CR’s chart is because the data is in percentage terms – the unemployment RATE, right? – and in the years directly after the war, the civilian labor force was much smaller as a percentage of the population. Taking absolute jobs numbers, we’ve already swallowed up more than all those recessions combined.

On the Real World Economics Review blog recently, it was asked what are the best forward-looking economic indicators. The responses came some from heavy hitters like Michael Hudson and Dean Baker, but they were equivocal. The same indicator can mean many things. But our answer was not so equivocal. Employment growth, which we’ll look at next week, unemployment rates and per capita income. These are not only the appropriate measures of economic health in the present, they are forward-looking too. They are the heart and lungs of the economy, the muscle mass. The intestines have to work, too, and so we need the financial sector or an equivalent. But when commentators say we’re looking at a long period of high unemployment and then things will be all right, it’s like saying we’re going to get somewhere without an engine or wheels on the car, just because we’ve made sure to have enough gasoline.

I should note that we also included Steve Keen’s private debt to GDP ratio and the credit accelerator as good forward-looking metrics, and they are. They capture changes in demand arising from the debt cycle. But employment and income are the base from which debt-driven changes rise or fall.

Our forecast for unemployment today and employment growth next week is pretty much our forecast for the economy. Which is continued weakness and deterioration, with opportunities for spikes related to technical issues and various crises in the financial sector.

Our backcast is similarly depressing. Unemployment has blossomed since the turn of the millennium, masked a bit by changes in the calculation methods. Raw numbers: Since the year 2000 we’ve added 25 million to the working AGE population and 2 million to the working population. Two million jobs for 25 million people.

The madness of austerity means unemployment trends upward as workers continue to be squeezed out of jobs. The continuing fragility of private financial institutions along with household debt burdens could mean unemployment spikes. You will see the chart describing the forecast. The trend line has no bounce to it. It just mechanically rises in this era of self-imposed stagnation. Even the spikes are relatively uninteresting hills compared to the mountain of unemployment they rise from.

Demand Side had some things to learn about unemployment in 2008 and 2009. Our forecast failed to anticipate the drop in the participation rate that happens in severe contractions. We said 12 percent headline unemployment was baked in. Headline unemployment rose to 10.1 percent in October 2009 before dropping back into the 9 percent range. Only some, not even half, of the gap between our estimate and the actual numbers was due to the drop in the participation rate – people going back to school, dropping out until they could get to to social security age, taking disability, taking part-time jobs and moving back in with the parents, robbing the society of its vitality and its ability to develop.

Much of the deficiency in the headline unemployment metric is captured in the U-6 measure of unemployment. Sometimes called the “all-in” measure. It is meant to count those who would take a full-time job if they could get one. This more closely corresponds to the numbers used in the other Great Depression. Read that as those who need a real job. Again, in 2008-09 we said U-6 would top out at 20 percent. It reached 17.4, again in October 2009. It briefly dropped below 16 percent, and is now on the rise again.

Looking again at the chart we presented in early 2009. We proudly placed our forecast directly next to the actual numbers, and you can see the lines are parallel and very close. That was to highlight that our forecast in the first year and a half of the Great Recession had been right on the mark. Then we split into the baseline, the optimistic and the pessimistic forecasts. The difference was what we counted on as the policy response. As we watched and saw no fundamental policy shift, we came to look more and more to the pessimistic line, which is that 12 percent and 20 percent. The baseline and optimistic were sadly too optimistic by a lot. But at least we got the real numbers in between. And you could argue we got the direction right. If you want to compare us with anybody.

But that brings into view our major mistake in 2008-09. We assumed the prospect of 10 percent unemployment and the clear failure of the private financial sector would bring about a conversion to the old religion of public works and full employment and strict structuring of the financial sector, and this would come primarily at the expense of the capitalists who had cost us so dearly.

Naïve is the kind word, I suppose.

We assumed there would be a rational policy response from the federal government, particularly when the new president proclaimed himself to be, first of all, pragmatic. We took that to mean he would be a second coming of FDR, who reached for what worked. The new president’s pragmatism, however, was actually code for compromise with entrenched interests. It was practical – pragmatic – not in the economic sense, but in the political sense. Even there it has failed, since the absence of real results is going to weigh heavily on the re-election balloon. More than the political pragmatism can fill it with campaign donations. Who knows?

But, as we said, it was a mistake to assume policy response in the appropriate direction and scale.

A favorite of the analysts we force ourselves to listen to is the term “stall speed.” Another favorite is “hard slog.” “Hard slog” is meant to define high unemployment and stagnant household demand for several years until debts are paid down, households de-leverage. “Stall speed” means there’s not enough growth to prevent decline.

The “hard slog” is not going to happen, since it defines a crisis in employment and incomes that is going to work its way up and out into the sectors that have more influence on the political system than households. We’ll have deterioration or recovery, not equilibrium. The engines of monetary policy have been revving at full throttle for 40 months. They’re providing a nice breeze if you’re sitting in the lanai with the financial sector, but they are not moving the economy anywhere.

You will see with the charts online that we’ve taken these numbers out two years – two and a half, really – to the end of 2013. We presume there will be a policy response, but we’re not going to mark it on the charts. We’ll wait to see what it is, and we’ll reserve the right to make adjustments should anything meaningful be enacted.

We expect spikes into the 10.5 range, but the baseline is a trend to 9.5 percent by year’s end, 10.1 percent by the end of 2012, and stabilizing slightly higher than that. U-6, likewise, trending upward at a somewhat steeper rate. 16.7 percent at the end of 2011, 17.9 percent at the end of 2012, flattening somewhat but still rising to 18.6 at the end of 2013.

It’s a fairly easy call, really. Made much easier by the official policy in governments domestic and foreign which can only be termed the Madness of Austerity.

Too many people say we cannot afford to hire people. What we cannot afford is idle labor. The three years of unnecessary stagnation we’ve endured since the financial sector crashed the economy is corrosive to the fundamentals of our economy and society.

The 2009 forecast for unemployment