Unemployment 12 – 13% PLUS

David Rosenberg posts today on unemployment, estimating it going up to 12 – 13%, as measured by U3. It is currently 10.2%. Another rate, more reflective of actual unemployment is U6. It is currently at 17.5%. A third measurement, offered by John Williams at Shadowstats.com, comes in around 22%. (As an aside, Williams is a diligent statistician who has been tracking government statistics for years. He restates them to reflect methodological changes over the years. It is really quite striking the differences between Williams’ figures and “official” statistics in key areas such as unemployment, GDP etc. It is worth taking a look at his site if you are not familiar with it.)

I think Rosenberg will be low in his estimates. He uses the current underemployed and the record-low work week statistic as the basis of his projection. Nothing wrong here. But, in addition to these effects, we have others that will likely come into play. First, the extension of unemployment benefits will produce upward pressure on the unemployment rate as certain people will use the extended benefits to either defer their search or to search harder and longer. Second, I don’t believe the impact of the tax and regulatory framework has been fully comprehended by business. Is healthcare going to pass? In what form? What will this cost per employee? When are taxes going up? Who will bear the brunt of them? These uncertainties have certainly frozen new hiring and investment, but when they become certainties, in whatever form, they will likely have add-on effects. Third, this economy is still going down. It has not yet bottomed.

Here is Rosenberg’s take, solid as usual:

U.S. UNEMPLOYMENT RATE HEADED FOR 12.0-13.0%

There are serious structural issues undermining the U.S. labour market as companies continue to adjust their order books, production schedules and staffing requirements to a semi-permanently impaired credit backdrop. The bottom line is that the level of credit per unit of GDP is going to be much, much lower in the future than has been the case in the last two decades. While we may be getting close to a bottom in terms of employment, the jobless rate is very likely going to be climbing much further in the future due to the secular dynamics within the labour market.

But in a nutshell, to be calling for a 12.0-13.0% unemployment rate is meaningless except that it is very likely going to be a headline grabber. The most inclusive definition of them all, the U6 measure of the unemployment rate, which includes all forms of unemployed and underemployed, is already at 17.5%. The posted U3 jobless rate that everyone focuses on is at 10.2% (though if it weren’t for the drop in the labour force participation rate, to 65.1% from 66.0% a year ago, the unemployment rate would be testing the post-WWII high of 10.8% right now). The gap between the U6 and the official U3 rate is at a record 7.3 percentage points. Normally this spread is between 3-4 percentage points and ultimately we will see a reversion to the mean, to some unhappy middle where the U6 may be closer to 15.0-16.0% and the posted jobless rate closer to 12%. This will undoubtedly be a major political issue, especially in the context of a mid-term elections and the GOP starting to gain some electoral ground.

Think about it. We haven’t yet hit bottom on employment but that will happen at some point. Employment is not going to zero, of that we can assure you. But when we do start to see the economic clouds part in a more decisive fashion, what are employers likely to do first? Well, naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began.

So the business sector has a vast pool of resources to draw from before they start tapping into the ranks of the unemployed or the typical 100,000-125,000 new entrants into the labour force when the economy turns the corner. Hence the unemployment rate is going to very likely be making new highs long after the recession is over — perhaps even years.