10/18/2009 10:01 pm ET | Updated May 25, 2011

Jobs Story Could Turn More Gory

Hey, with the economy perking up, the Dow recently sprinting above 10,000, a sizzling jump of more than 50% from its March low, and growing talk out of Washington that we'll have a national health bill before year end, things are slowly starting to look honky dory again to a lot of folks.

Not, though, to the 15.1 million unemployed Americans who are no longer getting paychecks, nor the residents of the growing number of states being stung by double-digit unemployment rates. Nor for that matter the hefty share of the unemployed population (35.6%) that is out of work six months or more, and the 571,000 people who disappeared from the work force last month because they couldn't find jobs.

You've got to be a relative of Denny Dimwit to ignore this spreading economic cancer. Or, for that matter, give any legitimate credence to the administration's non-stop rah-rah public relations campaign that the economic horror story is all but over.

Not everyone agrees with me. Frequently, when I bring up the rising number of job losses to some economists and market pros, I come out a loser, often being tagged as an ignoramus for failing to recognize that unemployment is a lagging economic indicator, not a leading economic indicator.

As one well-publicized economics professor put it to me in stinging language the other day, "Why do you ask me about unemployment? It only makes you look uninformed and stupid."

Continuing, he went on to say, "Wake up; All you have to do is read a newspaper." Everyone, he observes, already concedes unemployment will go somewhat higher, but it should peak some time in the first half of next year at a little over 10% as the economy takes a turn for the better. (The general view is it will peak in the range of 10.3% to 10.5%, versus it's current rate of 9.8%.)

The professor's parting biting shot: "Don't quote me because I don't want anyone to know I even spoke to you." He also reminded me that, "In case you have any memory or hearing problems, unemployment is a lagging economic indicator."

Granted, this has been the case in the past. But a couple of pros -- both of whom see a much darker jobless picture than most people expect -- suggest it will be dramatically different this time out. In other words, they say, the time-worn view that unemployment is a lagging economic indicator (usually peaking about six months after the end of a recession) is no longer applicable because of the prospects of many more layoffs stemming from a much weaker than expected recovery.

"We've entered a new era of much higher chronic joblessness, which denotes a long-term period of economic stagnation," says Martin Weiss, the head of Weiss Research in Jupiter, Fla., who notes the news on the unemployment front remains pretty grim and is likely to remain that way.

For example, he points out there are now five people competing for every available job. Further, if you factor in part-time workers who can't find full-time jobs, as well as those who have given up looking for work, the official unemployment rate is no longer 9.8%, but nearly double that at 17%. Taking this exercise one step further, he notes that if you count both the unemployed and the discouraged workers (anyone willing to work, but who has given up looking for up to a year), the jobless rate then climbs to 21.4%.

To Weiss, this all means "we're not going to follow the recovery patterns that we've seen in past recessions and the lag time will be far more stretched out than it used to be."

That's also the thinking of Madeline Schnapp, economics director of TrimTabs Research, a West Coast liquidity tracking service partially owned by Goldman Sachs.

Over the past 25 years, she points out, recessions have resulted from industry overexpansion and inventory buildups and reductions. Not this time, she says. The latest downturn was caused by excessive credit and consumer deleveraging. Factor in, as well, the current woes and you hardly have a solid foundation for an economic recovery, Schnapp says. Those specific woes:

--9.8 million workers are collecting unemployment.

--Another 3.8 million are collecting emergency unemployment benefits (a reference to unemployed people who have been out of work for more than 26 weeks).

--5.2 million homeowners who are no longer paying their mortgages, and contracting income,

--Income is still contracting rapidly, with wages and salaries off 4% to 5% year over year.

To Schnapp, it all adds up to declining consumption, mounting job losses and an economy that won't grow.

That worrisome trio struck me as a trio of Halloween trick and treaters dressed up as Frankenstein, Dracula and the Wolf Man.

In terms of jobs, Schnapp looks for a 10% unemployment rate in November and an ensuing jump to 11% by next summer. That would raise the number of unemployed at that point by another 1.6 million to about 16.7 million.

In viewing the most recent unemployment data, some market observers who follow the job figures point to a sunny note -- namely, that the number of people filing unemployment claims over the past week dropped by 10,000. But these observers, Schnapp notes, are ignoring the fact that the number of people filing for emergency benefits in the same period rose by 16,000.

Given her expectations of surging job losses, which means reduced consumption, Schnapp sees only sluggish economic growth. For the third quarter, she expects a 2.7% spurt in GDP, largely because of the stimulus from the cash for clunkers program. But for the current quarter, she looks for a marked slowdown, with a puny GDP gain of from 0.5% to 1%.

Looking to next year, Schnapp pegs GDP, if we're lucky, at between flat and up 1.5%. And if we're not lucky, she adds, maybe a decline of 1.5%.

As Schnapp sees it, the only reason we haven't seen a collapse in consumption is because the 9.8 million people collecting unemployment and the 5.2 million households not paying their mortgages are spending money on some things.

Many consumers, she notes, are viewing things as getting better, including the government bailed-out banks. But she feels that's a blindsighted view, arguing that the big banks are in for a lot more pain going forwarded. They're piling more debt on top of toxic debt, which is hardly the right prescription, she notes, for turning around their operations, in turn enabling them to resume lending and giving the economy a renewed shot in the arm.

If our jobs bears are right, the bottom line seems more like the bottom of the economic barrel since a consumer who is not earning any money is in no shape to spend us back into prosperity. And such a dismal condition, the folks at TrimTabs tell me, is not what bull markets in stocks are all about. In any event, if you're looking for a job, don't hold your breath.

Write to Dan Dorfman at