The decrease in the unemployment rate to the lowest level since March 2009 will hit the nightly news tonight and morning papers tomorrow, and it will feel good. Anything to improve sentiment is obviously good for the economy. Consumer confidence is still very low, and this news will help. Psychology is very important for the recovery.
While feeling better is a clear positive, it is premature to celebrate. The Establishment Survey of US businesses (as opposed to the Household Survey, which is used to calculate the unemployment rate) told us that only 125K jobs were created in November. This level of job creation is generally just enough to offset an increase in the labor force during "normal" economic times. However, we're still seeing a large number of people leave the labor force because they are discouraged and can't find work. And while the under-employment (U6) rate fell to 15.6% in November from 16.2% in October, the rate is still very high. By our estimates, at this year's pace it would take well over 10 years to replace all the jobs that were lost during the Great Recession (8 million).
We think the focus will likely return to Europe in the days/weeks ahead. While this week's announcement of coordinated central bank action to make dollar loans more available is undoubtedly helpful in averting a near-term liquidity crisis, the issue of European bank solvency remains a significant threat. Earlier today, German Chancellor Angela Merkel completely discounted the possibility of a Eurobond. This limitation removes an obvious tool for dealing with the crisis. We expect further volatility driven by European headlines.
At the beginning of the week, several of the world's central banks coordinated ready and affordable liquidity for European banks. These moves represent good news and bad news. Support and assistance are not offered to, nor are they needed by, the strong and fit. These remarkable actions indicate grave opinions that necessitate profound actions. We are encouraged that these global issues are being addressed and believe that this is a good start.
The increased liquidity does not address the real problem of troubled European sovereign debt, which threatens the solvency of European banks and almost guarantees a European recession. At this point, however, the markets seem to be anticipating further action by the European authorities to address the core problem. Disaster seems to have been once again averted, and the world financial markets are grateful. We are hopeful that all goes as planned.
We expect a muddle-through economy for a few years in the US as the consumer and governments deleverage. As world events evolve, it is important not to become overly ebullient or fearful. Remember that ignoring the yelling and screaming and paying attention to the price of fish is the best advice in the fish market.
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