Tuesday, November 17, 2009

Could Unemployment Breach 12%? 13%?

Economist David Rosenberg made some news last week on Bloomberg's Surveillance when he speculated that the unemployment rate in the United States could hit between 12 - 13%, higher than most economists are currently projecting and clearly an outlier forecast. I'm not entirely sure why the call is apparently so controversial.

Among the things that Rosie looked at in doing his analysis is the so-called Under-employment Rate (U-6) minus the Unemployment Rate. A chart of that difference looks like this:

The average difference between the two is just over 4%; it's currently a record 7.3% (17.5 - 10.2). (U-6 is only available since 1994.) Now, we can get back to the long-term average many ways, but it's certainly not out of the realm of possibility that one way we'll do so is to see unemployment at 12% while the U-6 drifts back down toward 16%. Would anyone consider that possibility crazy?

On a related note, continuing to add to the file on the plight of small businesses, I came across the following information over the weekend as to their importance to our economy:

Small firms (<500)
• Represent 99.7 percent of all employer firms.
• Employ just over half of all private sector employees.
• Pay 44 percent of total U.S. private payroll.
• Create more than half of the nonfarm private gross domestic product (GDP).
• Hire 40 percent of high tech workers (such as scientists, engineers, and computer programmers).
• Are 52 percent home-based and 2 percent franchises.
• Made up 97.3 percent of all identified exporters and produced 30.2 percent of the known export value in FY 2007.
• Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited.

And, perhaps most importantly:

Firms with fewer than 500 employees accounted for 64 percent (or 14.5 million) of the 22.5 million net new jobs (gains minus losses) between 1993 and the third quarter of 2008.

This is the group that, according to the NFIB's monthly SBET [.pdf], is simply not seeing much light at the end of the tunnel. So the question needs to be asked: When the NFIB reports that the country's "job generating machine is still in reverse," and we know that its member firms account for ~64% of net new job creation, how are we going to achieve sufficient job creation to make a meaningful dent in the un- and under- employment rates before Rosie's forecast comes to pass?

Here's what the SBET survey looks like with regard to Hiring Plans:

So, hiring plans for small business are, in fact, incrementally worse now than they were one year ago (-1 vs. 0). There's no more inclination on the part of this business cohort to add employees now than there was one year ago, and in that period the unemployment rate has increased dramatically. Makes Rosie's forecast seem fairly uncontroversial to me.