Unemployment gets a status change

In the realm of economic forecasting, unemployment is supposed to be a "lagging indicator." In other words, the unemployment rate and job loss figures keep getting worse well after the economy has started growing again. Companies wait to boost hiring until the economy forces them to. (And sometimes, as we've seen in the last two "jobless recoveries," they never really ramp up again.)

Knowing that unemployment has historically been a slowpoke in responding to the end of a recession is supposed to give us some comfort as we watch the unemployment rate march remorselessly toward 10 percent or higher. Never mind, we tell ourselves, that's to be expected.

But what if this time is different? Money manager John Hussman speculates that current economic circumstances just aren't typical. (Found via Felix Salmon who found it via Henry Blodget.)

In typical recessions, unemployment tends to be a lagging indicator, and the employment figures themselves tend to move up and down roughly in concert with the overall economy. In the current downturn, however, the unusually high debt burden and precariousness of mortgages among households creates a dynamic that we don't usually observe. In the current cycle, as Ray Dalio of Bridgewater has correctly (in my view) pointed out, unemployment is likely to be a leading indicator of the economy. In an overleveraged economy, job losses can be expected to be followed by further delinquencies and mortgage foreclosures. While I don't expect that this will cause a violent feedback loop, I do believe that it is glib to assume that the employment markets and the U.S. economy are on a one-way track to improvement.

The consumer spending figures and sharp contraction in household credit card debt back this up. Americans are extremely cautious about the future right now, and the job losses that are inevitable over the next year will only encourage us to keep a tighter watch on our finances. Which, in turn, will make it even harder to kick-start the kind of demand that really would lead to economic recovery.