In an economy in which farming, mining, and manufacturing are the most important driving engines it seems very reasonable to think of unemployment as a lagging indicator, that is an economic measure that improves after other measures have already improved. In an economy like ours that is primarily dependent on consumer spending, maybe not so much:
Mohamed El-Erian says economists are wrong to dismiss unemployment as merely a lagging indicator, a sign of where the economy has been. For the chief executive officer of Pacific Investment Management Co., the 26-year high jobless rate is also an omen of things to come. The climb in the September rate to 9.8 percent, double the level at the start of last year, leaves the U.S. saddled with about 15 million people out of work and with limited prospects. That will further hurt the housing market and weigh on the wages of those still employed, threatening to undercut the economic recovery, according to Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania.
“Today’s unemployment rate is much more than a lagging indicator,†said El-Erian, whose Newport, California-based Pimco manages the world’s largest bond fund, in an e-mail after the Labor Department report on Oct. 2. “It is also a signal of future pressures on consumption, housing and the country’s social safety net.â€
Also, take a look at this from later in the interview:
El-Erian, 51, sees the U.S. entering what he calls a “new normal†— a sustained period of annual growth of about 2 percent — as Americans adjust to a world where credit and jobs are less plentiful. In the five years before the recession began at the end of 2007, gross domestic product expanded at an average annual rate of 2.8 percent.
And that barely produced enough jobs to keep up with the increase in population. That’s consistent with my earlier musings.
From the front lines in Orange County, CA: since we’re prudently (for once) staying out of the home buying market for a while, we are renting. Rents of single family homes are dropping. The house we leased a year ago for $4,000 we could probably now get for $3,500.
I’m no expert but this looks like increasingly desperate home-owners in urgent need of cash flow to pay their mortgages. There are not enough relatively solvent renters to go around so I imagine we’re going to see some serious capitulation on home sales soon as these guys dump their homes or go into foreclosure. Must be a lot of people hanging on by their fingernails.
The prevailing wisdom right now is that in most markets rents are still high relative to prices and are expected to drop.
Hmmm I’m thinking not very good work here. I think the lag in unemployment isn’t simply dependent on the types of industry. You are describing cyclical unemployment here, and what we are likely seeing is structural unemployment–the latter is where people shift between sectors in terms of employment thus leading to a longer spell of unemployment.
I don’t buy the implicit view that these people will be unemployed for a very long time. As I’ve noted in the past, people being unemployed is really like seeing un-used resources. Resources that can be productive. Thus, while the spell of unemployment maybe longer, I doubt it will be permanent.
Aren’t these the guys who you were mentioning in regards to doing shoddy work on evaluating risk?
Regarding your older post,
You are operating from the stand point that GDP should be linear, this is wrong. Suppose you have a savings account with $1 in it and it compounds annually at 2%. You will get a graph that starts out rather flat and then rises rather rapidly. Is it a bubble? Hardly, it is simply the result of compounding. Why shouldn’t the larger economy be similar? Why not build off of what we already have?
Also, your model would consistently underestimate growth early on in the historical series you use, then it over estimates growth, then underestimates it again. In other words, there is indications of systematic errors suggesting that you’re model is mis-specified. Thus, conclusion based on that model are dubious when extending it out past the historical data you are using (e.g. 1949 – 1984). GDP is not a stationary process so using models assuming stationarity will lead you astray.
It doesn’t seem to me that El-Erian has substantiated that unemployment is a lagging indicator. Employers are still not going to hire new employees until they are confident that doing so will be supported by revenue growth. For one thing, the employer gets dinged by unemployment insurance for a “mis-hire.” If you want employers to hire, then figure out what employers want.
I don’t disagree that unemployment hurts consumption, but isn’t that always true with a panic/depression/recession? Unemployment insurance minimizes the effect. Should the federal government have pulled the plug on unemployment insurance in the relatively higher employment states? Should the stimulus bill directed more energy to projects that would need unskilled employees? Should the government have introduced a payroll tax holiday at the beginning of the year?
Yeah, I see your point about compounding, Steve. What I don’t like about the graph is that the increases follow interventions and I see no reason that another intervention will cause things to “get back to normal”. The idea of perpetual motion machines make me nervous, too.
Re: structural unemployment. I’ve suggested it before but I think working up a model in which time to enter given fields rises would be interesting.
Well unemployment IS a lagging indicator, the claim here is that it is more than a lagging indicator, but one that is also going to prevent the recovery from occurring or seriously delaying it.
I’d argue this is only true if there are substantial resistance to wages. If wages can adjust then unemployment will decline. If not, then it will persist. While there might be short term stickiness to wages I’d argue that as time goes by that stickiness would not be as much of a factor.
Dave,
Here is one sitation.
Looks like it is downloadable for free.
Oops, I had a typo. I meant that it didn’t appear that El-Erian had shown that unemployment is NOT a lagging indicator. Carry on everybody.
I think El-Erian is just acknowledging that we cannot have a debt based economy forever. We hit the wall when people had debt running at about 130% of their earnings, coincidentally pretty close to what it was in the late 1920’s. A consumer lead recovery to prior levels looks unlikely. An export based recovery? Who will buy? We will gradually build up demand again, but unless we leverage up again or make some tech break through, it is hard to see big growth again.
Steve
California Unemployment Trends – August 2009
California Unemployment Trends in Heat Map form:
here is a map of California Unemployment in August 2009 (BLS data)
http://www.localetrends.com/st/ca_california_unemployment.php?MAP_TYPE=curr_ue
versus California Unemployment Levels 1 year ago
http://www.localetrends.com/st/ca_california_unemployment.php?MAP_TYPE=m12_ue
Which is why arguments in favor of the stimulus tend to sound forced or flat. At best we can get back to modest/reasonable growth. A strong robust recovery does not look to be in the cards. But Krugman, Reich, et. al. are out there saying we need even more stimulus. They really are arguing for the Japanese model 2.0.