Peter E. Kretzmer, of Banc of America Securities, projects unemployment getting much worse.
The unemployment rate rose to 6.7% in November. The smaller-sample household survey indicated a 673,000 decline in employment. However, with many exiting the labour force, unemployment rose only 251,000, restraining the rise in the jobless rate for now. We foresee an 8% unemployment rate just after mid-year 2009.
We also expect the Fed to move its formal target funds rate to 0.5% at the December 15-16 meeting, a decline of 50 basis points. The size of the move is in part ‘psychological’, as the Fed is now engaged in quantitative easing. But with the extreme job loss, a larger drop in the target rate will likely be carried out, regardless of money market side-effects.
Barron’s describes this as a “grim forecast.” The way things are going, however, we’d be happy if we only hit 8% unemployment by mid 2009. If history is any guide, we could easily leapfrog into double digits by next summer. In the great depression, we saw unemployment leap from an almost non-existent 3.2 to 8.7 per cent in one year. The next year it climbed to 15.9 per cent