7.8% in Q4 2012.
7.3% in Q4 2013.
That’s where UBS now expects unemployment to fall to in the by the end of this year and next.
In a fresh note out this week, UBS’ economics team lead by Maury N. Harris offered a very sunny assessment for the labour situation in the US, with predictions of solid surprises for quite a while to come.
Key to their argument is a proprietary model of theirs which blends total loan volume, bank easing standards, and growth in loan demand.
All of these indicators are getting better, and therefore the job creation engine is going to continue to rev up, at a pass of 200K per month for 2012.
Here’s their chart of monthly job creation vs. the “model” which you know.
You might be dubious of a model that fits that nicely, since it screams “backtesting” but nonetheless, the connection between bank lending and job creation is pretty clear.
Here’s a very crude chart showing the connection between lending growth and employment growth. The one “hitch” is that at least for the last two recessions and recoveries, it was actually jobs that led credit, not the other way around.
All that aside, one thing UBS doesn’t predict is a rebound in the rate of participation, and that’s due to demographics.
There’s going to be an explosion in people over 55 over the next decade, and historically they work less.
Their analysis of demographic changes and job creation leads to an interesting conclusion:
Not only do we think that the Fed’s unemployment rate forecast is too high, but also that their estimate of the natural rate is too low. Squeezed from both sides, the unemployment gap—the difference between the unemployment rate and the natural rate—is likely a good deal narrower than they appreciate. If so, inflation pressures could be greater than the Fed expects, and so would be arguments for an earlier exit from current, extremely accommodative monetary policy. We expect Fed funds rate hikes to be initiated in mid 2013–around a year earlier than recent Fed guidance; a somewhat bearish development for government bond yields.
And that might be the most out-of-consensus call in the whole thing. Given the ‘on-hold-til-2014’ signaling from the Fed, an unexpected jump in inflation and a rate hike in 2013 would be a shock.