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Structurally High Unemployment For A Decade

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http://globaleconomicanalysis.blogspot.com...oyment-for.html

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 is a chart from the article. The annotations in pink and purple and the thoughts below are mine.

Non-Residential%20Structures%20Investment.png

click on chart for sharper image

Interestingly, the last two 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 we are in for a repeat (if not something much worse). The stock market? You tell me. What I will suggest is the stock market is 50% overvalued at this point.

That valuation can be corrected in one of three ways:

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

2) Price - The bottom is not 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.

...............

Harsh Reality From Bernanke

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

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

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

http://globaleconomicanalysis.blogspot.com...er-economy.html

Inquiring minds might be asking: Why does it take 2.5% growth to keep the jobless rate constant? The answer is the first 2.5%+- of GDP is based on hedonics and imputations. In plain English, the first 2.5%+- of GDP (if not much more) is fictional. When the economy is growing at 2% it feels like a recession because it probably is, even though no one will admit it.

Now consider the implications of a 2.4% GDP forecast for three decades.

If Bernanke is correct that it takes 2.5% GDP growth just to keep the unemployment rate constant, and McKinsey is also correct in its 2.4% forecast, we will be stuck with 10% unemployment for decades.

More green shoots sprouting forth.

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It doesn't matter to most people if we've 3 million unemployed. As the joke goes, if you're being chased by a bear, you don't have to run faster than it - you just have to run faster than your mate.

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