David Rosenberg - Unemployment Rate Headed Higher than Anticipated

David Rosenberg thinks the unemployment rate is headed much higher than anyone anticipates. If you recall, back in January when the stimulus package was crafted, the Obama Administration felt that passing the bill would mean an unemployment rate which would top out at 8.0%. As the situation deteriorated, the President recognized that 10.0% was more likely – a number we just got last week. But Rosenberg is the only one (except Meredith Whitney) who is talking about 12-13%.

As an aside, it was interesting to hear Whitney at about 3:15 into the third video in the link above from July. Right before she gives us the dreaded 13% number, she admits to lowballing her house price decline estimates in order not to be dismissed as wildly out of step with consensus. That pressure is something I discussed here.

Here’s what Rosenberg says:

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.

As I indicated when the employment numbers came out last week, we should expect the labor force participation rate to increase during recovery as discouraged workers come back into the labor force. The fact that the opposite is still happening means the unemployment rate will move higher (although 13% is sure to induce a double dip and I am not seeing this as a base case at this time).

Rosenberg’s political calculus also seems accurate. In my post, “the politics of economics” I said that President Obama needs to take more blunt measures to deal with the unemployment situation head on. Indirect measures are not going to be effective enough to prevent Democratic losses in 2010. Moreover, a recent poll released by Gallup today says that Republicans have now edged ahead of Democrats for 2010. If we see 12 or 13% unemployment, it will be much, much worse than that for the Democrats – and if Obama thinks getting his agenda through now is difficult, wait until 2011 when he may have to contend with more Republicans in Congress.

More of Rosenberg at the link below.

Source

Breakfast with Dave, 11 Nov 2009 (pdf) – David Rosenberg, Gluskin Sheff (free requires registration)

Comments

[davidbdc:]

Obama might be very effective with a Republican Congress actually. He could force them to submit balanced budgets, making them the bad guys for everyone's favorite program. He could make their cuts part of a deal for whatever is his main priority and move forward that way.

Outside of health care, I think Obama's biggest problems are actually with Democrats. If it were Obama and Republicans I bet they could compromise on some sort of sensible cap and trade, could compromise on budget choices (including higher taxes unfortunately), etc.

Regarding the 13%, I'm not sure I agree. I agree it will be a long long way back on the employment front. But keep in mind that about 50% of Americans are pretty resilient and while no one is watching the seeds of many new businesses are being sprouted in people's basements, garages, etc.....While our leaders have definately failed us, its too soon to write the obituary of free enterprise in the USA.

Nov 11 11:35 AM

[notsosmart:]

nobody knows anything.the brains that never saw this mess coming are the same ones now still thinking that their opinions mean anything.pay no attention to their or gov figures.think for yourself as almost all have an agenda.the blah blah blah that has to fill the airwaves 24/7 is a disgrace.watch a cartoon instead & you will have a better life.

Nov 11 11:44 AM

[bobbybutte:]

david rosenberg is a great contrary indicator

In march when the S&P is 680 he said we were going to 500

He is delusional please dont quote him

He is an american hater who does not understand what makes America tick

He and his degree is worthless understanding our economy

Nov 11 11:49 AM

[conceptwizard:]

It simple math. The economy is shedding 500,000 jobs per week, even at a gradual 10% slowing you would have a worse than 13% number.
The bigger issue is that the 9 million people that are only working part time hours are being under utilized they will have to be re-allocated full time hours gradually under extreme efficiency demands before any new hires.

Nov 11 03:25 PM

[Pat C:]

"Moreover, a recent poll released by Gallup today says that Republicans have now edged ahead of Democrats for 2010."


I hope this is more of an anti-incumbent message than a pro-republican. Bloomberg has good article about a Pew study. I wish we had more independents running for office. National parties and Washington in general is just not getting it.

Nov 11 03:50 PM

[Value Added:]

More Republicans in Congress would be far more helpful to the country and economy than the likes of Pelosi, Reid, and Frank - who all believe that the pockets of the taxpayer are unlimited; however, the systemic damage done to the underlying economic engine called manufacturing and the mountains of debt incurred by the profligate ways of both parties over several decades cannot be turned around quickly. Worse yet, virtually no one in leadership of either party seems to understand that either loss of manufacturing or greater indebtedness are serious problems! (Ron Paul excepted.) Anyone who expects Obama to be suddenly endowed with the wisdom or leadership skills to solve the current crisis is living a pipe dream. If Whitney is right and unemployment tops out at 13%, then I say we are very, very fortunate indeed. That would be the best case scenario we can hope for.

Nov 11 08:09 PM

[MarkitWacha:]

Here's a scenario:

* Unemployment reaches 13% after the stimulus wears off
* Christmas sales convince 100,000 small retailers to close.
* Unemployment reaches 15% by March 2010
* Dollar continues it's slide (already down 20% this year), causing oil price to be $100 or $120
* Republican Congress becomes reality
* Unemployment goes to 8% by 2011
* Oil continues upward due to 4% of GDP govt. borrowing.
* Mortgage rates creep up to 7%, stalling real estate
* next recession hits due to high oil price in late 2011
* Government raises taxes locally via property taxes.

I think the next good year won't be till 2014, when a new fusion plant becomes net-energy-positive (prototype already works), and the energy markets go bananas.

Long: TBT, DBC

Nov 12 09:33 AM

[buoy:]

Interesting punctuation :)


On Nov 11 11:44 AM notsosmart wrote:

> nobody knows anything.the brains that never saw this mess coming
> are the same ones now still thinking that their opinions mean anything.pay
> no attention to their or gov figures.think for yourself as almost
> all have an agenda.the blah blah blah that has to fill the airwaves
> 24/7 is a disgrace.watch a cartoon instead & you will have a
> better life.

Nov 12 09:45 AM