Friday, May 8, 2009

Unemployment and the Misery Index

Unemployment is painfully high, but it's been worse. Using conservation assumptions--that job losses add up to another 2 million over the next 6-12 months and the labor force grows at its long-term average rate of 1%--I come up with an unemployment rate of about 10%. I think that will prove to be the peak, and there is a decent chance, based on the slowdown in the rate of losses in the household survey of jobs and the slowdown in weekly unemployment claims, that the peak rate of unemployment will be a bit less than 10%.

The second chart is the Misery Index, made famous in the late 1970s, which is the sum of the unemployment and inflation rates. As the second chart shows, the Misery Index is much lower today than it was two decades ago. This has been a painful recession, but nothing like what we lived through back then, when inflation was in the double digits.


Spiral said...


In order for unemployment to peak at 10 percent or a bit lower, wouldn't that be based on the assumption that Congress and the President fails to pass any more destructive legislation?

For example, I would bet you would modify your forcast if you believed that a massive government oriented health care plan will pass through Congress within the next six months. If such a health care plan includes a regulation requiring all employers to purchase health care for their employees, this could easily drive up unemployment and make sure it stays there.

Higher taxes on corporations, which Obama has been talking about, could probably factor into this mix too, right?

I guess my point is, Yes. If the economy were left alone from today onward, you are probably right. Unemployment peaks at around 10 percent.

But it doesn't look like the economy is going to be left unmolested by Congress and the President.

As soon as the economy recovers its equilibrium, Obama, Pelosi and Reid will give it a hard kick in the groin and the economy will need yet more time to recover.

Scott Grannis said...

My assumptions are that the economy is now beginning to recover, and that job losses will continue to slow and eventually turn positive.

I think Obama's destructive policies have already contributed to weakening the economy by frightening capital into hiding--that's what drove the stock market down in February and early March. I don't think universal health care will happen quickly, and not in the next 6 months. Taxes won't go up soon. These are things that may be negatives next year. Meanwhile the economy has some relief and it can improve at least a little.

Even with destructive fiscal policy, I think the economy can grow. It will probably take us a long time to return to trend growth. Recovering our former levels of prosperity might take a very long time, but still we can grow since things are so depressed now.