Saturday, September 14, 2013

‘Animal spirits’ and the natural unemployment rate

The San Francisco Fed reports median estimate of the natural rate of unemployment in 2013 is 6.6 percent (source). Other estimates put the rate at 7.9 percent (source). Assume the current unemployment rate is the current natural rate, at 7.3 percent. How long until confidence collapses if the rate remains fixed at that level? Obviously it will take infinitely long for the adaptation level to converge to the current level, but when does it get within 0.1 of the adaptation level? That actually doesn’t occur until March 2016. But this is not a realistic path.

The crossover from “unemployment rate below adaptation level” to “unemployment rate above adaptation level”—the signal of collapsing confidence—is always preceded by a leveling out of the smoothed (12-month MA) unemployment rate, which has not yet happened. This is a necessary but not sufficient condition for a collapse of confidence to be imminent.


We will monitor developments for this occurrence.

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