November 2018 - Bubbles and Bottoms for Consumers -

Consumers are starting to feel the squeeze and as usual, this squeeze starts in the housing market. The number of US mortgage applications is now at an 18 year low, despite the fact that mortgage rates are at a relatively affordable level.

One of the main reasons for this low level of US mortgage applications is the fact that consumers are still deleveraging from the previous debt cycle that ended in 2008. If you would compare this consumer deleveraging to the corporate debt binge that is taking place simultaneously, it is quite easy to see that the next bubble won`t take place in the consumer sphere, but rather among large corporations.

In the following chart you will see the unemployment rate, the natural rate of unemployment minus the employment rate, and the long-term natural rate of unemployment. The natural rate of unemployment is a concept by Milton Friedman and Edmund Phelps, and basically says that even when an economy is running at full steam, there will always be a group of people who are unemployed. This can, for example, be due to a mismatch in education, wages, or a reluctance for an employee to travel further than a certain distance or time. You can see that when the unemployment rate dips below the long-term natural rate of unemployment, a recession takes place soon after. Over the past 40 years the shortest duration for a recession to take place was 21 months after the dip, and the longest was 50 months. Currently we are at 19 months, and this means that we are likely very close to an official recession.

Because a person has to be either working or looking for work to be counted 
as part of the labour force, an increase in the number of people too discouraged to continue 
their search for work would reduce the unemployment rate, all else being equal - 
but not for a positive reason.

- Ben Bernanke -
