Modeling, Analytics and Business Intelligence

Unemployment Forecasts too Optimistic

Posted in Economy by Sanjay Bapna on February 14, 2009

Elsby, Hobjin and Sahin examine the percentage change in unemployment duration and unemployment inflows.  The ramp-up in change in inflow is sobering to even the pessimists. Current unemployment rates forecasts (+9 % by WSJ polled economists by Dec. 2009) are perhaps too optimistic.

Percent Change Unemployment Duration, Inflows

A pattern observed in prior recessions has been that increased inflows are often a precursor to increased duration and further increases in unemployment (see Figure 1). This pattern suggests that further weakening of the labour market looms on the horizon, an outcome that would amount to a recession more severe than any seen in the US in the last forty years. This highlights the important need for a successful US stimulus package to stem the tide of a worsening macroeconomic situation in 2009.

Unemployment in the US had already begun to ramp up in early 2007, long before the official recession start date in December 2007 and the vagaries of the financial crisis that came to a head in the latter half of 2008. Figure 1 suggests that the initial impulse to the current recession may not have been the credit crunch, but rather that the credit crunch aggravated already worsening economic conditions.

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