Consumers
are starting to feel the squeeze and as usual, this squeeze starts in the
housing market. The number of US mortgage applications is now at an 18 year
low, despite the fact that mortgage rates are at a relatively affordable level.
One of the
main reasons for this low level of US mortgage applications is the fact that
consumers are still deleveraging from the previous debt cycle that ended in
2008. If you would compare this consumer deleveraging to the corporate debt
binge that is taking place simultaneously, it is quite easy to see that the
next bubble won`t take place in the consumer sphere, but rather among large
corporations.
In the
following chart you will see the unemployment rate, the natural rate of
unemployment minus the employment rate, and the long-term natural rate of
unemployment. The natural rate of unemployment is a concept by Milton Friedman
and Edmund Phelps, and basically says that even when an economy is running at
full steam, there will always be a group of people who are unemployed. This
can, for example, be due to a mismatch in education, wages, or a reluctance for
an employee to travel further than a certain distance or time. You can see that
when the unemployment rate dips below the long-term natural rate of
unemployment, a recession takes place soon after. Over the past 40 years the
shortest duration for a recession to take place was 21 months after the dip,
and the longest was 50 months. Currently we are at 19 months, and this means
that we are likely very close to an official recession.
Because a person has to be either
working or looking for work to be counted
as part of the labour force, an
increase in the number of people too discouraged to continue
their search for
work would reduce the unemployment rate, all else being equal -
but not for a
positive reason.
- Ben Bernanke -
The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.