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Why Unemployment Will Stay High for a Decade


It takes GDP growth of 2.5% to keep jobless rate constant. And that's not going to happen.

Inquiring minds are digging into the July 2009 Opinion Survey on Bank Lending Practices.

The survey shows that bank lending standards continue to tighten at varying rates by loan category.

Calculated Risk discussed the survey in Lending Standards Tighten, Loan Demand Weakens. Here's a chart from the article. The annotations in pink and purple and the thoughts below are mine.

Click to enlarge

Interestingly, the last 2 recessions began just as investment in non-residential structures peaked. The stock market peaked at the same time.

Note that investment continued to decline long after the last recession was over. Also note when the stock market bottomed following the last recession.

Are we in for a repeat? In regards to investment, odds are high that we are (if we're not in for something much worse). The stock market? You tell me. What I'll suggest is the stock market is 50% overvalued at this point.

That valuation can be corrected in one of 3 ways:

1. Time -- Earnings improve over 5 years with the stock market going nowhere.

2. Price -- The bottom isn't in and a significant pullback, perhaps even another crash, is in store.

3. Some combination of time and price.

I vote for door number 3, but any scenario is possible.

From the loan survey:

9. Apart from normal seasonal variation, how has demand for commercial real estate loans changed over the past 3 months?

Click to enlarge

CRE Demand Still Collapsing

Demand for commercial real estate loans is still collapsing. Massive overcapacity and weak consumer demand are the 2 key reasons.

The implications are severe.

Commercial Real estate was a massive driver for jobs in the post-2000 recession. Think of all the retail stores that were built: Walmart (WMT), Target (TGT), Home Depot (HD), Lowe's (LOW), Walgreen (WAG), Nordstrom (JWN), Abercrombie & Fitch Co. (ANF), and so forth.

Think of the grocery store build-out that followed the build-out of residential subdivisions: Safeway (SWY), Kroger (KR), Whole Foods (WFMI), and Osco-Jewel & SuperValue (SVU).

Now think of all the merchandise it took to fill those stores and the trucking (and trucking jobs) involved to keep stores stocked for consumers whose demand was thought to be insatiable.

Grocery-store demand is still present given that people have to eat. However, the demand for new stores (and new hires) isn't. As for the rest of the retail sector, it's as I said on April 18, 2008: Shopping Center Economic Model Is History.

Currently we're in the midst of the Worst Performance Ever For Back-To-School Sales. Expect Christmas season to be miserable again.

Consumer demand is dead. That demand isn't coming back any time soon, and there's no driver for jobs if it doesn't.

Harsh Reality from Bernanke

In the Incredible Shrinking Boomer Economy I noted a harsh reality quote from Bernanke:

"It takes GDP growth of about 2.5% to keep the jobless rate constant. But the Fed expects growth of only about 1% in the last 6 months of the year. So that's not enough to bring down the unemployment rate."

What happens if GDP can't exceed 2.5% for a couple of years? What about a decade -- or on and off for a decade?

If you've come to the conclusion that we're going to have structurally high unemployment for a decade, you're right. Ask yourself: Is that what the stock market is priced for?
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