Eurosclerosis Is U.S. Diagnosis Not Japan Stagnation (Update1)
Dec. 14 (Bloomberg) -- The U.S. may have avoided the Japanese disease of prolonged stagnation only to end up with a dose of eurosclerosis: chronically high unemployment in a growing economy.
Economists are starting to extend their forecasts through 2011 and the results don’t look pretty. Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, forecasts that the jobless rate will rise to 10.75 percent by the middle of 2011 from 10 percent now.
Even optimists such as Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York, see unemployment remaining well above the 20-year average of 5.6 percent. Kasman, whose forecast of 3.4 percent growth next year is higher than the 2.6 percent median of 83 economists surveyed by Bloomberg News, projects the unemployment rate will average 9.9 percent in 2010 and 9.3 percent in 2011.
“We had been worried about turning into Japan,” says David Wyss, chief economist at Standard & Poor’s Corp. in New York. “But it may be more likely that we end up with sclerosis.”
Persistent European-style unemployment means that the Federal Reserve, which holds its last policy meeting of the year Tuesday and Wednesday, won’t raise its benchmark interest rate from near zero through 2010, according to Curtis Arledge, co- head of U.S. fixed income in New York at BlackRock Inc., the world’s largest asset manager.
The median U.S. forecast for this year and next masks big differences among economists about the outlook. Mohamed El- Erian, chief executive officer of Newport Beach, California- based Pacific Investment Management Co., manager of the world’s largest bond fund, argues that the U.S. has entered a “new normal” period with annual growth of 2 percent. He sees growth fading in the second half of next year after an initial burst.
“I’m more bearish than the consensus,” says El-Erian, who sees the dollar experiencing “periods of downward pressure” during the year. “We start the year at 3 percent and then end up at 2.”
Comments: The preceding article excerpts from Bloomberg are rather telling.
Economic forecasts are not calling for the typical 4 or 5% GDP bursts after a recession ends, but sluggish growth in the 2 to 3% range with high unemployment.
We remind the reader of Okun's Law which states that for every 2% increase in the unemployment rate, GDP falls by 1%. Since the natural GDP growth rate is 3% at full employment, unemployment will not decrease if GDP growth fails to breach the 3% level.
This does not bode well for the housing market, as high unemployment is a major drag on any price recovery. In fact, we can expect to see a continuing correction in housing in many areas of the country.
Stubbornly high unemployment, a weak housing market, and low or negative GDP growth are all deflationary signals.
From the indicators we see so far of high unemployment and stagnation, it appears the US is both Japan and Europe.