29 October 2010

Unemployment To Be High In 2011

Historically, unemployment rates track economic growth rates over the previous year. If that trend holds, we need 3% annualized GDP growth simply to tread water at a 9.6% unemployment rate. Even a 5% annualized GDP growth rate leaves us at 8.7% unemployment. The consensus expectation is closer to the current rate of GDP growth, which is 2%. This could return us to 10% unemployment.

Reality is messier than a simple formula, of course. The changes vary by about +/- 1 percentage point from the predicted value, and unemployment rates tend to be sticky, rarely changing more than one percentage point per year in periods of moderately good or moderately bad economic growth. Also, the low changes in absolute unemployment rate percentage is partially a function of the change being from starting point unemployment numbers well under the current 9.6%, so GDP change may produce a bigger result.

Also, GDP has still not recovered to pre-recession levels. We are 0.8% below where we were when the recession started, and probably won't return to that point until early 2011.

Housing prices in Detroit have fallen to 1995 levels, in Las Vegas to 2000 levels, and in Denver to mid-2002 levels. Seattle and Portland, Oregon remain at 2005 levels (suggesting that they may yet have room to fall).

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