Unemployment a Lagging Indicator?
Posted on July 2, 2009
It’s somewhat surprising that the market was down today on the unemployment data given that the accepted meme is that unemployment is a lagging indicator.
On the surface, the “unemployment lagging indicator” meme seems self-evident. Clearly companies don’t start hiring in earnest unless they see improving business conditions. The implication of the meme is simply that unemployment is an effect of a recession, rather than its cause.
However, whenever a meme is so widely accepted and quoted it pays to become skeptical and to question its intellectual basis. As for the “unemployment lagging” meme, the meme, of course, begs the question as to what caused the recession in the first place? It’s when one reflects on the actual cause of our economic troubles that one realizes that this time it may be truly different and maybe the meme is not all it’s cracked up to be. It’s quite possible that during this recession the relationship between unemployment and recovery may reverse.
Housing Fuels Our Economy, but With Rising Unemployment How Will Housing Recover?
The reason for advocating this position is simply based on the realization that for nearly a decade or more the entire US economy, including Wall Street’s paper economy, had been propelled upwards by a massive housing bubble. However, now that the housing bubble has burst, it’s nearly impossible to see how business conditions can improve substantially if the housing market does not bubble up again. And yet if unemployment is rising, how can housing recover sharply? It simply can’t.
Ipso facto, rising unemployment indicates only one thing: Housing will remain depressed for a long time and therefore there can be no significant economic recovery. So paradoxically, rising unemployment is perhaps a leading indicator this time around, since it’s a sign that housing will remain depressed, and our economic problems are far from over.
Perhaps the only way to get the economy to recover without a new housing bubble, would be to generate economic growth in other economic sectors in an attempt to make up for the losses in the “housing” economy. This, however, will prove difficult given the sheer size of the “housing” economy and its broad social reach.
Moreover, the government still seems oddly intent on propping up the financial/paper economy, as opposed to launching large enough programs to soften the blow in the production/real economy. Unfortunately, 99.9% of the country gets absolutely no benefit from the trillion dollar bailouts of mega financial institutions, and are actually harmed financially by these asinine bailouts (i.e. higher taxes will be needed to support the trillions the Fed continues to print to keep mega financials on life support and to buy their garbage assets).
Stable financial markets are absolutely no help in driving a sustainable economic recovery, since so few see the fruits of renewed speculative fervor in financial instruments. Interestingly one wonders why the government still believes that funneling money into the likes of Goldman Sachs via a wide variety of conduits, backstops and asset purchase programs, so that they can award their average employee $700K in annual salary, represents an intelligent solution to our economic troubles.
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