Labor Market Prospects Darken

November 20, 2008

Gloom about job prospects was mostly responsible for a five-point drop in Belgian consumer confidence to -22 in November from -17 in October. The unemployment component of the index worsened by 16 points from October and by 50 points from November 2007. Thanks to Germany, where unemployment dropped by 94K in the three months to October, the unemployment rate in Euroland is just 0.3 percentage points above the cyclical low of 7.2%. With Germany and Euroland as a whole, the situation is going to deteriorate in a hurry before long.

The U.S. labor market is behaving already worse than during the past two recessions in many respects. Total jobless claims last week surpassed 4 million and were at the highest level since December 1982. New unemployment insurance claims of 542K hit a 16-year high and were about 8% greater than forecast. New claims for the past four weeks averaged more than a half million at 506.5K. That was up from weekly averages of 480.5K in the four weeks to October 18, 462.5K in the four weeks to September 20, 441K in the four weeks to August 23, and 393K in the four weeks to July 26th. U.S. employment in November is likely to post a similar decline to those of 240K in October and 284K in September, and the jobless rate will be near to 7% versus 6.5% in October and sub-5% readings a year ago. Unemployment is a lagging indicator. Such averaged 3.1% in 1929 when the Great Depression began, then rose to 8.7% in 1930, 15.8% in 1931, and 23.5% in 1932. The rate averaged 20% or more for four consecutive years, peaking at 24.9% in 1933. It then subsided to 14.2% in 1937, bounced back to 18.9% in 1938 and did not return to single digits until 1941 when the average was 9.7%. I provide this history not to suggest that it will even approach such heights but to illustrate how extensively and rapidly the labor market can collapse when a recession is both deep and long.

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