In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Friday, January 01, 2021

Question #3 for 2021: What will the unemployment rate be in December 2021?

by Calculated Risk on 1/01/2021 11:58:00 AM

Earlier I posted some questions for the new year: Ten Economic Questions for 2021. I'm adding some thoughts, and maybe some predictions for each question.

3) Unemployment Rate: The unemployment rate was at 6.7% in November, up 3.2 percentage points year-over-year, but down from the peak of 14.7% in April.   Currently the FOMC is forecasting the unemployment rate will be in the 4.7% to 5.4% range in Q4 2021.  What will the unemployment rate be in December 2021?

First, the headline unemployment number significantly understates the current situation. Here is a table that shows the current number of unemployed and the unemployment rate (as of November). Then I calculated the unemployment rate by including the number of people that have left the labor force since early 2020, and the expected growth in the labor force.

Left Labor Force4,1399.0%
Expected Labor
Force Growth

As the economy recovers, many of the people that left the labor force will probably return, and there will likely be more entrants into the labor force (although recent demographic data has been dismal).   

Lets say the economy adds back 6 million jobs, in 2021, of the 9 million jobs still lost since early 2020.  Meanwhile 3 million of the remaining 4.1 million people that left the labor force return, and the labor force grows by 2 million over the two year period (2020 and 2021).   The unemployment rate would fall to 5.9% by December 2021 - above the high end of the FOMC forecast.

Here is a graph of the unemployment rate over time:

unemployment rateClick on graph for larger image.

There has been a quick bounce back in the unemployment rate from the peak unemployment rate in April.  

However job growth has slowed recently, and the winter months will probably see little progress.

Even after the pandemic subsides, there are areas of the economy that will only slowly return to normal.

Employment Recessions, Scariest Job ChartThe second graph shows the job losses from the start of the employment recession, in percentage terms.

The current employment recession is by far the worst recession since WWII in percentage terms, and is still worse than the worst of the "Great Recession".

It took several years to recover all the jobs lost following the 2001 and 2007 recessions, and that might happen again depending on fiscal policy, and how many permanent jobs were lost.

Year-over-year change employmentThe third graph shows permanent job losers as a percent of the pre-recession peak in employment through the November report.

This data is only available back to 1994, so there is only data for three recessions.

In November, the number of permanent job losers increased to 3.743 million from 3.684 million in October.

The pandemic recession has already seen more permanent job losses than the 2001 recession.   It seems likely these will be the job that will be slow to recover.

Depending on the estimate for the participation rate and job growth (next question), my guess is the unemployment rate will decline into the mid 5% range by December 2021 from the current 6.7%.   Hopefully I'm too pessimistic.

Here are the Ten Economic Questions for 2021 and a few predictions:

Question #1 for 2021: How much will the economy grow in 2021?
Question #2 for 2021: Will all the jobs lost in 2020 return in 2021, or will job growth be sluggish?
Question #3 for 2021: What will the unemployment rate be in December 2021?
Question #4 for 2021: Will the overall participation rate increase to pre-pandemic levels (63.4% in February 2020) , or will it will only partially recover in 2021?
Question #5 for 2021: Will the core inflation rate increase in 2021? Will too much inflation be a concern in 2021?
Question #6 for 2021: Will the Fed raise rates in 2021? What about the asset purchase program?
Question #7 for 2021: How much will RI increase in 2021? How about housing starts and new home sales in 2021?
Question #8 for 2021: What will happen with house prices in 2021?
Question #9 for 2021: Will inventory increase as the pandemic subsides, or will inventory decrease further in 2021?
Question #10 for 2021: How much damage did the pandemic do to certain sectors?