On July 26, 2013, we said the following:
“…the best we could expect for the unemployment rate, on the downside, is for 6.9%. It is important to understand that the 10% and 3.8% unemployment rates are undesirable scenarios. The 10% unemployment rate is in the depths of a ‘recession’ and the 3.8% unemployment rate at the height of a overextend economic boom.”
After falling below 3.80% in December 2019, the unemployment rate skyrocketed with the advent of the coronavirus (COVID). We continue to maintain the view that unemployment above 10% or below 3.80% cannot be sustained for very long.
Below is our expectations for how the unemployment rate will change going forward.
The work of Charles H. Dow is very instructive and guides our effort in project the direction of markets going forward. The most important concept at this time is the 50% Principle. For the purposes of estimating downside risk, we have to consider the midpoint from the prior low to the most recent peak.
In this case, the most recent low in the unemployment rate was 3.50% and the recent peak (which could be adjusted) was 14.70%. This puts Dow’s 50% Principle at 9.10% as the most likely target to achieve.
One challenge with this assessment is that seldom is there ever such a sharp increase and decrease in the normal course of change. Therefore, while the unemployment rate for June 2020 has dropped to 11.10%, it is likely that a moderation between 14.70% (possibly higher) and 11.10% is necessary before there is an adjusted to the historical trend towards a gradual decline over time.
The point is that volatility is the watchword as the economy adjusts to the current environment.