Happy new year?!

In August I posted a comment explaining why the US unemployment rate was to climb sharply (see here) and this is now happening. On Friday it was announced that the US unemployment rate jumped to 5.0% in December, up from 4.7% in November and ahead of expectations of 4.8%. Non-farm payrolls only rose by 18 thousand, the weakest figure since August 2003. Equity markets have slumped 2% on the news and the high yield market has also sold off.

The fact that the US unemployment rate is now at a two year high has inevitably grabbed the headlines, but it’s not actually the level of unemployment that matters, it’s the change in the unemployment rate.

This chart shows that there is a very close correlation between the change in the unemployment rate (measured as the change in unemployment over a rolling six months, right hand axis) and US economic growth (left hand axis). The unemployment rate is now up 0.4% since June 2007, and 0.6% higher than in March last year. Looking back over almost 50 years, a jump in unemployment of half a percent over a six month period has always resulted in or coincided with recession. Watch this space