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Unemployment Is No Longer A Lagging Indicator: El-Erian

Wednesday, 7 Jul 2010 | 11:17 AM ET

Unemployment has shifted from a lagging indicator to a leading one and is warning government policymakers to confront problems in an economy mired in slow growth, Pimco co-CEO Mohamed El-Erian told CNBC.

Unemployment line
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Unemployment line

The consideration of unemployment as a lagging indicator is a favorite mantra among economists who believe the rate primarily looks at the past rather than what is to come.

But the internal details of current trends paint a different picture: More than half the labor force out of work for more than 26 weeks, the average length of unemployment at greater than 35 weeks, and the unemployment rate of 25.7 percent for 16- to 19-year olds.

"These are structural aspects which cannot be solved overnight, cannot be solved with a cyclical mindset," El-Erian said. "And they are worrisome because they make the unemployment rate not only a lagging indicator but also a leading indicator."

The US has been "an outlier" among nations who have been confronting the challenges posed by what Pimco, the world's largest bond fund with more than $1 trillion in assets under management, calls the "new normal" of prolonged slow growth.

"Somehow in the US we are caught in this active inertia that results in just a cyclical response," said El-Erian, the firm's co-CEO. "We need more than that. we need cyclical and structural."

He cited China, Brazil and Russia specifically as countries that have taken more proactive approaches to their problems. While other nations have looked at austerity and structural reform, the US is saying, 'Hey, what we need is growth.' What you need is harmonization that is about growth, is about austerity and critically is about structural reform."

Mohamed on the Markets
What's next for the markets, with Mohamed El-Erian, PIMCO CEO & co-CIO and Douglas Holtz-Eakin, Financial Crisis Inquiry Commission.

As for investors, El-Erian said stock prices are "getting toward fair value. We're not quite there yet because I don't think analysts quite understand what the new normal looks like in terms of lower growth and lower top-line revenue growth, but we're getting there."

He said the bond market, with the yield on the benchmark 10-year Treasury note yield below 3 percent, is close to fair value.

A double-dip recession, which has gathered more talk about economists, is a "risk scenario" but not what Pimco considers the most likely event, he said.

"We find it striking that consensus, which used to romance a 'V' (recovery) is now moving toward what we've been calling the new normal, and some people are going right through the new normal and romancing a double-dip and a depression," El-Erian said. "What you're seeing is a move in consensus that has repriced the bond market and is repricing the equity and credit markets."

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