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Floyd Norris' column on Saturday (sorry, it's behind the pay wall) made me wonder whether we were being too pessimistic last Friday about the unemployment picture. Norris convincingly argued that one indicator--the Institute of Supply Management's finding that more companies said they plan to hire rather than lay off employees for the third consecutive month--strongly suggested the drop in the rate in November from 10.2 percent the month before was indeed a signal that the worst was over. But I still couldn't get past other data showing the recent downturn to be so much deeper than other post-war recessions. Surely the depth of the recession had some relevance to the discussion, but what was it exactly? Then I came across several posts today that cleared the fog. In the first, Fed watcher Tim Duy pointed out that there's a distinction to be drawn between cyclical and structural unemployment, and in fact, Norris nodded in that direction toward the end of his piece. The point is, job growth during the recovery that preceded the recession was so anemic, because of the rise in structural unemployment, that it will take a huge rebound in real GDP to produce enough new jobs to put a big dent in joblessness. As Calculated Risk pointed out today, GDP must rise by more than 2 percent annually to reduce the unemployment rate at all within the next 12 months, and by 3 percent just to get it under 10 percent. And does anyone really expect real annual GDP growth of 6 percent? That's what it would take to get the rate down to 8 percent by December of 2010. So yes, the worst may be over. But the recovery is likely to be jobless, or at least jobless enough to prevent the sort of wage gains that would sustain a significant recovery without the help of a fresh credit bubble. In fact, the U.S. economy needs to keep expanding without interruption until 2020 for unemployment to fall to its pre-recession low if historical trends are any indication, according to Lakshman Achuthan and Anirvan Banerji, co-founders of the Economic Cycle Research Institute. Just to get back to 5 percent unemployment, once considered to be "full employment," the authors said it would take a business cycle upswing lasting about as long as the record-setting 1991-2001 expansion. "Should the next recession arrive earlier, as we suspect, it will take much longer," Achuthan and Banerji wrote. "The implications constitute nothing short of a wake-up call for policy makers who promise to get job growth back on track." Sorry to have to say it, but we stand by last Friday's pessimism.
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