Economics and unemployment

A few posts ago I came across as positive regarding the economy. I still am – I have every reason to believe we’ve hit the bottom. As I said, however, hitting the bottom isn’t ‘done’. One of the ugliest representations of this fact is going to be unemployment.

Even in my fairly positive forecast we see unemployment above 7% to the end of the year. Part of that is due to a hidden reality. Specifically, a lot of people have dropped out and aren’t counted in the U3 curve. When the economy heats up, paradoxically we’ll see an increase in U3. At the same time we see more people getting jobs, we’ll see people regaining hope and re-entering the pursuit of positions.

There are two places to watch, I think, to get a better handle on this. First is the U6 line of the unemployment report. That’s the number pushing toward 17% — and likely to approach 20% before we’re completely done. Second is total labor force participation employment.

See, since 1970 the percentage of the population that was working has been generally increasing, from around 57% to around 64% in 2000. Since 2000 it’s been declining, but in the last year and a half it’s declined a LOT. As in, it was around 63% in 2007. Now it’s under 60%.

I had one person tell me (back in 2006) that the reason for the decline was just people getting well enough off to go back to single-worker households. Given that average wages declined in that period it made no sense, but he held that argument. This, though, is ugliness without mitigation.

I expect to see this number improve in 2010. Unfortunately the improvement will cause a masking of unemployment – people will be getting jobs, more currently defeated will start seeking, and U3 (and to some extent U6) will stay relatively high.

Watch for moods – much harder to track, much more informative as to what is going on. It’ll be interesting.


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