The recent report on global unemployment from the OECD predicted that developed country joblessness will reach post WW-II highs soon and will not improve much  over the next two years.

Now, Noble Prize winner Paul Krugman has predicted that US unemployment will not peak until 2011. Speaking in Slovenia, Krugman said, “(U.S.) unemployment will peak in early 2011 … certainly staying very high and possibly rising all next year.”

Krugman and the OECD may well be right, and, if they are, the economic recovery in the US does not have much future.

Most recessions of the last 50 years have ended with sharp growth in GDP and employment figures. Typically GDP levels recovery within a year of the end of a recession to move back above their pre-recession levels. With unemployment above 10% for an extended period, consumer spending cannot recover. A new Bloomberg News survey shows that only 8 percent of U.S. adults plan to increase household spending, almost one-thirds will spend less, and 58 percent expect to “stay the course.” Concerns about job securityare almost certainly at the core of people’s plans.

The current assumptions baked into the Budget and stimulus package are that unemployment will stay below 10% and will recover fairly rapidly after the recession ends, which should be during the current quarter. Most signs point to these forecasts as being much too optimistic. That means that tax receipts will be below forecasts and the deficit will rise more than expected. It also means that the engine of GDP growth, consumer spending, will not rebound at any point in the foreseeable future.

All that being said, the drag of the jobless will pull the economy back under.

Douglas A. McIntyre

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