Unemployment – a lagging indicator, but from where do you start counting?
I keep hearing people saying that never mind unemployment is a lagging indicator, so never mind huge unemployment number, the economy is getting better. I guess, may be some parts of economy are getting better, but not the parts related to consumers. We’ve seen rally the last few days in retail stocks on the premise that consumer is going to start shopping again any minute now. And when somebody brings up the unemployment number, the answer is – never mind unemployment, it is lagging indicator.
But you know it is quite possible for economy to be falling and unemployment to be falling at the same time. When recovery starts, the businesses will still be laying off because they have no money to pay the salaries, but still they will be laying off at a slower pace. And I haven’t noticed any slow down yet. The US businesses are very quick to lay off people, so I don’t think increase in unemployment is too much lagging. Increase in employment is lagging, that is true, because businesses are very cautious in adding people.
El-Elarian said something very interesting the other day in response to that same point. When unemployment is at high levels like it is now, it becomes forward looking indicator because people see unemployed people around them, they get worried about loosing their jobs too, they don’t spend, and they hunker down. So, it affects forward consumer spending.
So, my point is, unemployment only becomes a lagging indicator when the rate of unemployment increase slows dramatically, until then it is still a forward looking indicator.