Unemployment The Most Important Challenge Facing the U.S. Economy

Economics / US Economy Jan 13, 2010 - 09:33 AM
By: Claus_Vogt

From the start of the economic and financial crisis that began in 2007, I made it clear that this was not a garden variety recession. Instead, I said, it was the aftermath of the bursting of the largest real estate bubble the world had ever seen.

Many developments of the past three years support my thesis. Now I predict that this will not be a garden variety recovery either. We should expect some false starts in the economy and a bear market rally for stocks.

And my prediction has two important observations backing it up …

Observation #1 — A Secular Bear Market in Stocks

Take a look at the chart below to see what I mean by this. At Monday’s closing price of 1,147 the S&P 500 Index was at about the same level as in the summer of 1998. So investors who bought stocks 11 years ago, haven’t earned a single dime. And if you consider inflation, they’re actually down by a whopping 25 percent!



The rollercoaster ride from 1998 until today could teach investors a lot about Wall Street and the madness of crowds, about greed and angst — and about themselves if they dared listening. For most investors, though, these lessons have been extremely expensive. And sadly, the rollercoaster hasn’t stopped yet.

The stock market is still overpriced … normalized price earnings ratios, as well as dividend yields and other traditional measures of valuation, are not even close to where they have been during historical long-term buying opportunities. In fact, they’re at levels commensurate with long-term tops!

Hence, I strongly believe that the rollercoaster has not ended its blood-freezing tour. And it’s only climbing the next interim top after which another fast descent will take place — probably below the March 2009 lows.

Next, let me give you …

Observation #2 — A Secular Bear Market in Employment

Real prosperity goes hand in hand with employment. So even if the GDP was growing strongly, doing so without job growth wouldn’t feel right and would probably be just a mirage.

Now look below at my second chart … total nonfarm payrolls. As you can see something very unusual happened here. For the first time since this data series became available, all the jobs created during a prior economic expansion have been lost. Akin to the stock market’s numbers, we are now at the same employment level as 10 years ago.



Source: Federal Reserve Bank of St. Louis

Just think about it: No new jobs in a country with a population growing 1.1 percent per year. That’s about 3.2 million people each year … 32 million over 10 years … yet no new jobs!

The U-3, the official and often cited unemployment rate, is 10 percent. However, the no less official but rarely cited U-6 unemployment rate, which includes discouraged workers, marginally attached workers, and part time workers who want to work full time, comes in at 17.3 percent.

This is a frightening development, a development fitting a depression much more than a garden variety recession.

A Negative Economic Outlook

“I don’t think many people grasp just how much job creation we need to climb out of the hole we’re in.â€