Unemployment Duration Surges in U.S.

The Unemployment rate in the U.S. reached 10.2% in October 2009. This number already looks bad for a country struggling to get out of recession.A deeper look into the unemployment numbers in the U.S. suggest that things are much worst then what they seem to be already. This article primairly looks into the increase in duration of unemployment and its implications on the economy and spending.

The table below gives the duration of unemployment on an annual basis and monthly basis for the U.S.

Duration of Unemployment (Annual Basis)

Source: Fraser (Economic Indicators Oct,2009)

Duration of Unemployment (Monthly Basis)

Source: Fraser (Economic Indicators Oct,2009)

The most worrying factor about the above data is that the number of people unemployed for greater then 27 weeks has surged to 35.6%. Even in the recession post the Nasdaq bubble, this number had never gone above 21-22%.

Living without a job for more then six months would typically mean erosion of savings for the family which in turn would lead to much lower spending. Even for individuals who have unemployment insurance, it would lead to a sharp decline in consumption. Moreover, the Government, who already is in a huge debt burden has to shell out more Dollars to provide funds for the unemployed who are insured under the Government program.

It is also a matter of concern to see that the numbers have not changed or reversed its trend with the recovery in the economy in the third quarter of the current fiscal. This puts me in serious doubt about the sustainability of the recovery.

Moreover, a lot of things have to do with sentiments more then anything else. High unemployment coupled with a high duration of unemployment will ensure that even the people who are employed don't go agressive on their spending and consumption. This in turn will impact the economy which is largely dependent on consumption.

Another interesting data to observe in the general unemployment rate and the unemployment rate among full time workers. The chart below gives the data for the same.

Unemployment Rate Chart

Source: Fraser (Economic Indicators Oct,2009)

As the data above shows, there is a full one percent point difference between the unemployment rate in general and the unemployment rate among full time workers. This also shows that the scenario is worse then what the numbers show. It is the part-time jobs which is making the unemployment numbers look better then it actually is. Moreover, higher number of part-time jobs means that the corporations are still very unsure of the economy as it is relatively easier to get rid of a part timer.

Also, when we are talking about consumption and spending, it is the younger generation who generally cares the least about savings and they generally end up spending most of their income. The chart below gives the rate of unemployment among people between 16-19 years of age.

Unemployment Rate among people below 20 yrs

Source: Fraser (Economic Indicators Oct,2009)

In the last one year, the number of unemployed from 16-19 years of age has gone up from 20.7% to 27.6%. This is a huge increase and must be having a strong impact on consumption and spending.

Conclusions

We have seen huge Government spending since the crisis began in October 2007. This has been supplemented by agressive rate cuts and all other measures to flood the system with easy money to make the economy revive again. Still, two years into the crisis, the unemployment scenario is still going from bad to worse.

In my opinion, there are several reasons for this:

• The Government spending on infrastructure would take time to show its impact on the real economy in terms of job creation.
  

• The Government spending has been largely targeted towards consumption and not capital formation and boosting capital spending. This will not help in creating large number of jobs.
  

• The economic recovery has been largely lead by the Government sector. The private sector is still shrinking and job losses from private sector are not helping the unemployment numbers get any better.
  

• The policy of low interest rates has failed miserably as it has only lead to speculation in different asset classes. There is no lending and the already overleveraged consumer does not want to borrow.

I think the path to recovery is a relatively long and painful one for the U.S. But its is important that the Government stops targeting consumption and starts to lay more stress on capital spending and capital formation. Higher level of production and exports could help create significant number of jobs. I think it is time when the U.S gets back to hard work rather then living on debt and on subsidies (in the form of artifically lowered currencies) from the Asian countries.

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