In the opinion of Lombard Street Research, a leading provider of independent macroeconomic research located in London, New York and Hong Kong, a depressing 8 percent Unemployment rate could lie in our future like an explosive mine floating in the pathway of the American economy luxury liner. In the view of Lombard Street, harsh budgetary constriction will result in zero growth or even a reduction in the first two quarters in 2013.
“Our view that unemployment could rise above 8 percent and that profits will be squeezed reflects a forecast of nil to negative 2013 (first quarter) growth, and further stagnation in (the second quarter),” a Lombard Street report that was released on Friday stated.
Beginning in 2013 when the Social Security payroll tax cuts were not renewed, and it returned to its 2010 level of 6.2 percent, an increase of two percentage points, it was the largest part of the tax increases made by Congress in addressing the fiscal cliff.
Sales from retail climbed 0.1 percent in January, according to data released by the Commerce Department. This with the bump in payroll tax should sound alarm bells across the country as tax increases indicate a drop in the rate of consumer spending, Lombard Street noted.
“Retail sales data encouraged the idea that the payroll tax hike from 4.2 percent to 6.2 percent, worth 1 percent of personal disposable incomes, would pass off with little impact. But the effect of the payroll tax was only partly in January,” it said, indicating that only a modest impact would have been expected for January.
“In February the full effect of the payroll tax hike will be reflected in disposable income, and the initial savings “cushion” is likely to give way, so real consumer spending could be down.”
“Given underlying labor force growth of about 1 percent, this would add 0.7-0.8 percent to the unemployment rate, which was 7.9 percent in January. Even a less pessimistic view of (first quarter) and (second quarter) would send unemployment over 8 percent,” it said.
Federal Reserve chief Ben Bernanke has stated that interest rates will be kept low until the unemployment rate reaches 6.5 percent. At the current pace of 150,000 jobs created per month, and 110,000 new entrants to the labor force, and no unforeseen eventualities (good luck with that one), it won’t be till January 2017 that we beat unemployment.