Unemployment: The Proverbial Tail?

Wagging the economic dog, that is. My brother's kinda like that. He's so small relative to his high-frequency, exuberant tail, it really appears to wag him when he gets really excited. Like anytime there's a ball or frisbee in the vicinity. Silly pup. Those don't taste so good. Not that he seems to notice or care.

So anywho, much has been made lately of green shoots and such, and how the worst has been seen since unemployment's still getting worse, but that's to be expected, given how it's a lagging indicator and all. Some of us otherwise mental laggards aren't so certain. I personally would prefer to see the bowl all full than half. I'm greedy that way. No, really.

Mohamed El-Erian of Harvard and PIMCO fame had this to say recently:

The unemployment rate is traditionally characterised as a lagging indicator and, as such, is viewed as having limited predictive power. After all, unemployment is a reflection of decisions taken earlier in the cycle so the rate always lags behind the realities on the ground – or so says conventional wisdom.

This conventional wisdom is valid most, but not all of the time. There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviours and outlooks.

And the ever-rational John Hussman, perhaps not unrelatedly, piped in with this:

Given current household leverage from mortgage and consumer debt, coupled with the inability to access mortgage equity withdrawals (that largely fed spending increases during the most recent economic expansion), my concern continues to be that unemployment will behave as a leading indicator rather than a lagging one. During typical economic downturns, there is always some feedback from employment losses to credit losses, but that effect has been more contained because debt burdens have not been nearly as high, and homeowners have not been saddled with negative home equity. The dynamic of this downturn is different, so investors should be slow to accept the “employment is a lagging indicator” argument under present conditions.

Now let's add in what we already know about Stupid Unemployment Games, and leave the rest as an exercise for the (hopefully otherwise still gainfully employed) reader...