U.S. Unemployment Outlook

July 23, 2009

The labor market cup regrettably remains more half empty than half full and is getting considerable attention from Fed officials.  New jobless insurance claims averaged 566K per week over the past four reported weeks, the lowest four-week average  since January 24th and down from 618K in the prior four weeks to June 20th and a peak four-week average of 658.75K in the four weeks to April 4th.  In times other than recessions, this gauge of layoffs generally runs below 400K per week.  It did not go above 400K until early in the third quarter of last year.  Before then, non-farm payroll jobs had declined by 133K per month in 1H08, and the unemployment rate had risen from 4.9% at the end of 2007 to 5.5% at mid-2008.  By September 2008, the month that Lehman failed, unemployment was at 6.2% after a quarter that saw jobs reduced by 208K per month and new jobless claims accelerate to just short of 450K per week.  In 4Q08, the pace of new jobless claims quickened to around 535K in December, employment tumbled 553K per month, and the unemployment rate advanced a whole percentage point further.  This year while new jobless claims surpassed 600K per week throughout the first half, unemployment increased by 1.3 percentage points (ppts) in 1Q and 1.0 ppts in 2Q, while jobs contracted by 691k per month in the first quarter and by 436K per month in the second.  In next week’s report new claims are widely expected to stay below 600K. 

It will be quite a while longer before new jobless insurance claims settle back to 450-475K, the threshold that was associated last autumn with a substantial acceleration of the trends in falling employment and a rising jobless rate.  At 9.5% in June, unemployment is only 1.3 percentage points below the post-1947 peak of 10.8% seen in late 1982.  The continuing very high layoff rate and the rapidly adverse trends in unemployment and employment associated with such a level create an extremely strong case that unemployment will be cresting above its prior peak of 10.8%.  So does the fact that the jobless rate peaked around a year after the last two recessions ended.  Unemployment will be climbing too fast for too many more months not to reach 11%, and that will exert a significant drag on private consumption.  Laid off workers are buried under much higher heath care premium costs, while everyone is struggling to dump debt and rebuild savings after the winter’s substantial destruction of wealth.  Add in the latest uptrend of energy prices, and one can understand why Fed officials are worried about prospects for consumption and uneasy about tightening policy for an extended period.

Euroland’s jobless rate has risen also to 9.5%, 2.1 percentage points higher than a year ago.  Such too has quite a distance to run higher before it peaks.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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