The 'New Normal' for Unemployment

The media can spin anything in a positive light. The market was up big Thursday on the news that jobless claims were "slowing". However, if you dig a little deeper into the unemployment situation, you might discover that the glass is actually half-empty...

From Bloomberg:

The number of Americans filing claims for jobless benefits last week held below levels seen in late June, before auto-related distortions set in, indicating firings are slowing as the economy stabilizes.

Applications rose by 25,000 to 584,000 in the week ended July 25, higher than forecast, figures from the Labor Department showed today in Washington. More than 600,000 claims were filed every week last month. The number of people collecting unemployment insurance decreased for a third week.

An analyst at Labor said distortions from the timing of auto-plant shutdowns “worked themselves out” of the data last week, returning claims to “trend.” While a resumption in hiring will be slow to materialize, payroll reductions are likely to slow as housing and manufacturing, the areas that led the economy into the worst recession in five decades, steady.

Who cares that the rate of claims is slowing? The magnitude of claims is still significant...more than 600,000 claims were filed every week last month. In addition, the unemployment rate is still increasing and will likely be in the double digits in the near future.



This glass still looks half-empty to me...and this isn't even the real picture. It's been estimated that the real unemployment rate in the U.S. is closer to 20%. These estimates include “underutilized” workers in the U.S. (i.e., those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking). Prior to the early 1990's, this was the method of calculation. Now the government manipulates the number in order to suit its political aims...

Regardless of which unemployment number you believe to be correct, the scary truth is that the U.S. is likely entering a "new normal"...and we may never see 5%-6% unemployment again.

Bill Gross discussed the his "new normal" thesis in Pimco's July Investment Outlook:

PIMCO’s driving thesis however, if not a juxtaposition, is succinctly described as a “new normal” where growth is slower, profit margins are narrower, and asset returns are smaller than in decades past based upon the delevering and reregulating of the global economy, which in turn should substantially inhibit the “gorging” of goods and services that we grew used to in decades past.

Forecasts based on econometric models inevitably miss these secular/structural breaks in historical patterns because it is impossible to quantify human behavior, and long-term trends involving risk-taking and in turn derisking are decidedly human in their origin. Bell-shaped curves with Gaussian/random distributions fail to anticipate that human beings do not make decisions by chance or independently of each other, but in many cases in reaction to one another. Humanity’s personal and social computers appear to be programmed that way. And so, instead of “normal” distributions, economists and investors must learn to be on the lookout for “black swans,” and if not, then certainly “fat tails,” which differ from the measurement of natural phenomena accepted in science. “New normals,” flatter-shaped bell curves, and structural shifts in previously accepted standards become not only possible, but probable as human nature reacts to itself and its prior behavior. The efficient market hypothesis was always dead from the get-go, but academic tenure and Nobel prizes were food for the unwilling or perhaps unthinking.

The question we should all be asking ourselves is: How will a "new normal" affect the returns of various asset classes over the next 5-10 years? I'm guessing that the answer probably won't be as rosy as the media is leading you to believe...

Full Disclosure: Long SDS

Comments

[Larry House:]

How many different names are you using, Cetin? r4g is just one.

Aug 03 05:00 PM

[Pat C:]

I took the liberty of revising your conclusion a bit:

"The question we should all be asking ourselves is: How will a "new normal" affect society over the next 5-10 years, WILL THIS LEAD TO MASSIVE DISCONTENT AND RADICAL CHANGES? I'm guessing that the answer probably won't be as rosy as the media is leading you to believe..."

Aug 03 05:31 PM

[Relative Le...:]

Pat C - You are absolutely correct with your revisions. The next 5-10 years will be a very interesting time indeed for the U.S.

There's a big difference between actual reality and a person's manifestation of reality...the longer it takes society to realize the change, the more radical the affect will be...

Aug 03 05:48 PM

[LilBob:]

This should come as a surprise to no one. Why do you think there was so much enthusiasm for globalization? It was to "normalize" wage rates in the developed world with those in the developing world. What too few realized at the time was that without working class people seeing a steady increase in wages you wouldn't be able to realize a steady increase in sales and-once the jiggering of commercial markets via the over-extension of debt instruments falls apart-you end up with massive declines in developed world economies. This trend will not reverse itself unless those who have the ability to direct capital investment end up realizing that increased spending in the developing world cannot over-balance declines in spending in the developed world.

The "new normal" will likely have the same result in this country that high unemployment levels had prior to the Roosevelt administration: a lot of Americans who thought they were well to do because they had a bit of savings and some money in the stock market realize they are a lot closer to the bottom than they thought and the influence of capital over the government starts to wane as politicians in our at least nominally democratic society are still beholden to the polling place.

Aug 03 06:35 PM

[The Geoffster:]

When the mainstream media reports unemployment numbers some commentator is usually on hand to discount the report with the observation that unemployment is a trailing indicator and green shoots have sprouted somewhere. It reminds me of the power the media has during Presidential elections when the economy is either improving or not depending on the prevailing political bias and regardless of the fundamentals. The Fed engages in this behavior to cheerlead the economy and spur demand. Meanwhile Treasury talks a strong dollar while doing everything it can to debase it. Once you learn to ignore the noise, you can make money following your own ideas.

Aug 03 08:06 PM

[conceptwizard:]

The unemployment rate climbed in all of the U.S.'s biggest urban areas during June, and 18 places had joblessness of at least 15%.

"For the sixth consecutive month, all 372 metropolitan areas had over-the-year unemployment rate increases," the Labor Department said in its report Wednesday.

The numbers in the department's Metropolitan Area Employment and Unemployment report are not seasonally adjusted.

The report said 144 metro areas reported jobless rates of at least 10%, up from six areas a year prior.

El Centro, Calif., had the largest jobless rate from June 2008, at 27.5%. Yuma, Ariz., was second with 23.1%. The lowest rate was in Bismarck, N.D., at 3.8%.

Aug 03 08:57 PM

[Moon Kil Woong:]

Thanks for the comment conceptwizard. Looking at cities,states, and regions to get the facts about unemployment might be much more valuable than the Federal government these days, although quite depressing. Apparently whatever the Fed does, it still has to face the fact that all this unemployment is hitting their tax revenues which are falling.

Sadly with Zirp and QE the most likely outcome will be several years of very high unemployment. If we are able to dig our way out, then we can look at another downturn as the Fed tries to raise rates back to a normal range. Once you hit 0 it is very hard to climb back. Japan still hasn't recovered. Why does the Fed insist we are better able to?

Aug 04 12:51 AM

[Homer II:]

Hey Obama.. where are those 5 MILLION jobs you promised in your campaign speeches last year???

Instead of squandering money buying junker autos, how about focusing upon using that money towards getting REAL jobs for Americans???

Aug 04 01:02 AM

[Carey Rowland:]

The LTCM debacle of the late 90s was an early sign of what has happened and what will yet unfold. Bill Gross' observations in RL's posting above, about black swans and fat tails--these will be the determinants for the <i><b>new normal.</b></...

Homer II's comment just above, about buying junker autos, is true. The <i>cash for clunkers</i> comedy is an indicator of the government's desperation, just as the TARP from which it arose was a desperate measure to begin with.

What this country really needs is a new manufacturing base, built upon a new growth industry or two. I don't have any money, and I am in fact one of those newly unemployed (although I write novels), but I'd suggest that you moneyed guys out there take some serious looks at pooling your resources and initiating a new infrastructure based on clean,efficient, 21st-century rail travel, rather than the inefficient, unsustainable automobile-junkyard- groupthink that is presently inhibiting our drive toward true progress and new paths of prosperity.

Let's get America busy again, building 21st century rails and railcars, with solar collectors on their roofs to power up the laptop-toting passengers within. And don't forget <i>heirloom</... seeds for all these newly unemployed growing a few veggies in the back yard to supplement their benefits.

Carey Rowland, author of Glass half-Full

Aug 04 07:26 AM

[Bjarne Jensen:]

The only way the government can get REAL jobs is to quit playing favorites and get out of the way of capitalism.


On Aug 04 01:02 AM Homer II wrote:

> Hey Obama.. where are those 5 MILLION jobs you promised in your campaign
> speeches last year???
>
> Instead of squandering money buying junker autos, how about focusing
> upon using that money towards getting REAL jobs for Americans???

Aug 04 06:40 PM

[TRIO:]

I believe the new Normal will be around 10%. If you want to know how difficult things are in the job market today, check with your favorite headhunter. In several states one out of five people are late or in foreclosue on their home loans. If my math is right I would deduct that the true unemployment in those states is 20% +or-2%.

I am truly glad that some people are making a boat load of money on the latest surge in the market. The question is how long will it take to figure out that beating the estimate on lowered expectations does not mean that businesses will be hiring. My qusestion is will they be in business a year from now?

Aug 05 05:43 AM

[consumerons...:]

If this is the 'new normal' that's fine with me. I work at a resort in the Ozarks. None of the "Omigod, the sky is falling" people have any wish to hear anything that doesn't support their phobic outlook but I have worked at this resort for going on eight years. This year is the busiest we have ever been. Sorry. The sky is not falling and I really don't care about all the numbers people can pull up to prove that it is. The vacationers that are forcing me to have to put in more hours per week than EVER are not a figment of my
imagination. Look, I make $8.75 an hour and since returning to work on Mar 1st (I am laid off from mid-Nov - Mar 1) I have saved and made investments currently valued at about $2,600. Hey, I did OK but not THAT OK. They're only up a couple hundred dollars. So since Mar of this year I've saved and invested about $2,400 on my $8.75 an hour. How the hell did I do that? I put in a lot of hours.
Look, I believe the economy's changing. At least I hope so. And I believe there's a lot of people out of work. And I have gotten in more than a few arguments online with some of those "poor, poor, people" that lost their $20, $30, or $40 an hour job and have had to find a new one paying closer to $10 an hour. "You can't live on that," they lament.
The people who are "suffering" the worst, in my opinion, are mostly people who expect to be compensated the same for each ounce of their sweat as I am for more like a half-pound of mine. Perhaps they should, if they think theirs is that much more precious, consider bottling and selling that shit.
I believe the American economy will no longer support union jobs sucking the life from our companies. These companies have to try to recover the cost somewhere. WHERE? People overseas won't spend more for products made by high-paid union workers and guess what? Americans - won't - either. I don't want your five-dollar widget when I can find one just as good in Wal-Mart for two dollars. Get it?
From all the people (Yes, PEOPLE - to hell with the silly numbers you can pop up) I've talked to, people like me are doing just fine. People like me who didn't get to finish college for one reason or another and don't expect to be paid as if we did are doing just fine if we're living within our means and saving money and not piling on debt. This is not an attack on folks with college degrees that SHOULD be paid more for the years of late-night cramming for tests and studying til they got headaches while piling up student loans. I'm talking about all the people no more special than I am who expect to be paid like doctors and engineers. Some folks need a reality check. I make $8.75 an hour, I'm doing just fine and will even retire with a decent dividend income in around ten years or less, but if you are one of those thinking "I deserve full medical & dental, a pension plan and $40/ hour because it "only adds X amount of dollars to the cost of the finished product" I'm suggesting maybe those days are over and maybe they should be.
My pension plan is frugal living and smart investing.
I don't have full medical & dental.
Why should I pay for yours? I'm doing real well and I don't feel sorry that I don't feel sorry for the manufacturing sector that expects to join unions right out of high school and extort wages and benefits most of us don't have and think it's that simple for the company that employs them to foist off the cost of all this onto the rest of us.

Aug 06 07:35 PM