Mish's Global Economic Trend Analysis

Kyle Bass on the End of the Debt Supercycle and a Coming Massive Devaluation of the Yen; Most Difficult Time to Invest; Belief Bubble
Nikkei Rises Above 10,000; Yen Drops to Weakest Level Since April 2011
Boehner Floats Fiscal Cliff "Plan B"; Obama Offers Concessions Regarding Tax on Wealthy
Normalized Unemployment Rates; Cyclical vs. Secular Forces

Kyle Bass on the End of the Debt Supercycle and a Coming Massive Devaluation of the Yen; Most Difficult Time to Invest; Belief Bubble

Posted: 18 Dec 2012 11:39 PM PST

Late last month, Kyle Bass, managing partner of Hayman Capital, shared his thoughts in a video at the University of Virginia Darden School of Business Investing Conference with Professor Ken Eades.

It is a fantastic interview that echoes many of the things I have been saying about Japan for quite some time.

Link if video does not play: Conversation with Kyle Bass

Interview Snips

Ken Eades kicks off the interview welcoming Kyle Bass mentioning that over the past few years his investment thesis has been then same. Eades then asks Bass to recap and review. what follows is Bass' reply.

Thematically, the bottom line is the total credit market debt-to-GDP globally is 350 percent. It's 200 trillion dollars worth of debt against global GDP of roughly 62 trillion.

It's of our belief you are going to continue to see lower global growth, and you're going to see certain countries hit the proverbial end-point or wall where they have to restructure their debt. We've been particularly dogmatic with our view there.

Investing around that particular idea is very difficult. As Dick Mayo [Chairman, Mayo Capital and Founding Partner of GMO] said today, it's actually the most difficult time in the world to invest in his lifetime, and I would echo his comments. Investing in the environment that I am describing to you is the single hardest thing to do as far as investing is concerned over the last few decades.

So this is a debt super-cycle that is coming to an end at various end-points for different countries. We think you are going to continue to see yield compression in the developed world. We think the US and Europe could actually see negative nominal rates over the next 12 months which is something that as an academic is very hard to understand, as a participant really hard to understand. But it seems we are seeing enough rhetoric and research done on the subject that it's actually a real possibility. Maybe it's only a 20% possibility but the fact that it's even on the white board is something that's worthy of paying attention to.

A lot has happened in Japan in the last 12 months. In fact, in the last 2 months we believe Japan has crossed that proverbial Rubicon. We think that you've seen 20 years of conjecture regarding Japan's eventual demise. And now we see a point where, in the last couple months what you see is a continued deterioration in their balance of trade. It's actually running at about negative $100 billion or close to 10 trillion Yen. And we think given this resurgence of Chinese nationalism over the Senkaku crisis [disputed islands], you're going to see that move another 1.5 to 2 percent or another $100 billion. Put that in perspective. What that means is we could see full current account negativity in Japan in October. That's something nobody is ready for.

Think about it. You have a secular decline in the population, you have a balance of trade that is literally being rewritten and falling off a cliff, and their GDP is now tracking negative 3.5 or 4 percent.

So what has to happen in Japan. Now their backs are against the wall. They have a full crisis, and they absolutely have to change the manner in which they deal with their currency. And so we think over the last couple of months they have crossed the final Rubicon that turns the whole situation around and weakens the Yen from a currency perspective. Then you are going to start to see, we think, in the next 12-18 months a move in their rates.

Basically Japan is entering it's final checkmate phase of the game.

[Ken Eades asked when will the October numbers come out]. ... That data gets released mid-December. I'm not focused on one particular data set. It's naive of me to think that I can call the end of the 70-year debt super-cycle with any kind of precision whatsoever.

What I'm telling you is when you look at all the inputs, look at their balance of trade, look at their full current account, look at the fact they have had 10 finance ministers in six years. You have the BOJ [Bank of Japan] independence somewhat usurped or revoked in the last few weeks when there is a press release put on the BOJ's website, a joint press release from the MOF [Minster of Finance], the BOJ, and the government, that analogous to Bernanke, Geithner, and Hillary Clinton issuing a joint press release saying we're going to end deflation.

This is how it begins to happen. You start to revoke the independence of the central bank and let the politicians run monetary policy, well this is how it falls apart.

So you have Shinzo Abe coming in, the elections in Japan will be around December 16, and Abe we think is a shoo-in, and he is saying they are going to do everything possible to get to 3 percent inflation. He doesn't even know what he wishes for. Because if he gets there, he detonates his debt-bomb.

[Ken Eades asked, next year is it possible you will be going long?] It's possible. Again, I don't want to be naive to say that it's going to happen in the next 12 months. All of the ingredients are there to have this viscous cocktail fall apart. I think that it could probably take a little longer. But to the extent that we see a bond crisis in the Yen that has a massive devaluation? Yes.

Current Account Update

Updated current account and trade balances were posted on December 9. Japan's current account balance surprised to the upside, but do not expect it to last.

Nasdaq reports Japan Current Account Stronger Than Expected.

Japan posts current account surplus of Y376.9 billion
Figure is higher-than-forecast but still down 29.4% from last year
Separate revised GDP figures show no change in overall contraction of 0.9% for third quarter
Second-quarter GDP revised to show small contraction

TOKYO--Japan's current account surplus fell in October from a year earlier, as the nation's trade deficit continued to expand, while separate revised gross domestic product figures showed that the economy may have already entered a recession.

The finance ministry said on Monday that the current account surplus narrowed to Y376.9 billion in October before seasonal adjustment. That was slightly larger than the Y218 billion surplus expected by economists surveyed by Dow Jones Newswires and the Nikkei.

"Speaking generally, exports have been the weakest link in recent data, and the direction exports take will be key for economic recovery," said Jun Kawakami, market analyst at Mizuho Securities.

Balance of Trade and Current Account

Please consider the trend in Japan's Balance of Trade

Japan recorded a trade deficit of 548.90 Billion JPY in October of 2012. Historically, from 1979 until 2012, Japan Balance of Trade averaged 635.3 Billion JPY reaching an all time high of 1608.7 Billion JPY in September of 2007 and a record low of -1476.9 Billion JPY in January of 2012.

Balance of Trade Since 2009

click on chart for sharper image

Starting in 2011, Japan's balance of trade has been consistently negative.

Please consider the trend in Japan's current account.

Japan recorded a Current Account surplus of 376.90 Billion JPY in October of 2012. Current Account in Japan is reported by the Ministry of Finance Japan. Historically, from 1985 until 2012, Japan Current Account averaged 1106.53 Billion JPY reaching an all time high of 3287.90 Billion JPY in March of 2007 and a record low of -437.30 Billion JPY in January of 2012. Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).

Current Account Since 2009

The trend in Japan's current account has been in serious decline starting 2011.

Japan will be in serious trouble as soon as its current account stays negative. That has not happened yet, but it will. As soon as it does, Japan's debt-bomb goes off.

For more on the Yen please consider Spotlight on Japan: Return of 'Abenomics', More Militarism, Tougher China Line; Outlook for Yen and Nikkei

For more on the conflict with China regarding disputed islands, please see China Skips IMF Meeting In Japan; Taiwan Claims Islands Too; What's the Dispute Really About?

Most Difficult Time to Invest

I wish to conclude with the statement by Kyle Bass "As Dick Mayo [Chairman, Mayo Capital and Founding Partner of GMO] said today, it's actually the most difficult time in the world to invest in his lifetime."

I endorse that statement 100%. Moreover, I would like to add that many now find investment decisions relatively easy. They look at monetary easing by the Fed, by the ECB, by China, etc., as a perpetual green light.

Clearly Kyle Bass does not see it that way, nor do I, nor does John Hussman. Indeed, I believe the only one's who find investment decisions easy are those who do not understand the risks.

Belief Bubble

As I have pointed out on many occasions, if the Fed could have prevented a collapse in 2008, it would have.

If Japan's central bank had an easy cure for deflation, it would have found it long ago. Instead Japan has a massive amount of debt, with nowhere to hide.

If the ECB had an easy solution to the crisis in Greece, Spain, and Italy, there would not be endless meetings followed by endless bickering.

Yet, for whatever reason, there is a bubble in the belief that central banks are in control.

Problem is Debt, With No Easy Cure

The problem is debt. As Bass pointed out "the total credit market debt-to-GDP globally is 350 percent. It's 200 trillion dollars worth of debt against global GDP of roughly 62 trillion."

The 70-year debt super-cycle is coming to and end. It could have happened last year, or the year before, but it didn't. It may or may not happen in 2013.

Those fully loaded in equities are either ignorant of these facts or they do not care. Those of us who are aware, but also aware the end cannot be precisely timed are the ones who look overly cautious. We are the ones who think "this is a difficult time to invest".

Prudent to be Patient

I am comfortable in my position that better times are ahead for those willing to be patient, even if I cannot precisely say when that will be. In the meantime, I am willing to sit with a position in gold, cash, and various hedges until better opportunities present themselves.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Nikkei Rises Above 10,000; Yen Drops to Weakest Level Since April 2011

Posted: 18 Dec 2012 05:05 PM PST

In a pair of related ideas, the Yen is sinking and the Japanese stock market is on a tear. Today the Nikkei crossed the 10,000 mark once again.

Yen Futures Daily Chart

click on chart for sharper image

Nikkei Futures Daily Chart

Yen Drops to Weakest Level Since April 2011

Bloomberg reports Yen Falls to August 2011 Low Versus Euro on Stimulus Bets.

The yen fell to its lowest level since August last year against the euro on prospects that the Bank of Japan will expand stimulus at the meeting that starts today, its first after the nation's general election.

Japan's currency traded near the weakest level since April 2011 versus its U.S. counterpart after data today showed the country's trade deficit widened in November. The 17-nation euro maintained seven days of gains against the dollar that pushed it to a seven-month high yesterday amid optimism U.S. lawmakers will reach a budget pact, reducing demand for the greenback as a haven.

"Yen-selling is likely to remain intact," said Koji Iwata, vice president of foreign-exchange trading in New York at Mizuho Corporate Bank Ltd., a unit of Japan's third-biggest financial group by market value. "The BOJ will probably disappoint the market if it doesn't boost asset purchases."

In the race for currency debasement, Japan will soon pass the Fed. Repeating what I said yesterday in Spotlight on Japan

Since Mid-November the Nikkei has been on an upward tear. The Yen has been in decline since the start of October.

Both trends have favorable fundamentals, and both are worth watching.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Boehner Floats Fiscal Cliff "Plan B"; Obama Offers Concessions Regarding Tax on Wealthy

Posted: 18 Dec 2012 09:40 AM PST

Boehner Floats Fiscal Cliff "Plan B"

Both house speaker John Boehner and president Obama have given ground in the "fiscal cliff" drama. The sides are still far apart but concessions now are steady. The fact there is ongoing movement makes a deal possible.

Will we get there? Can Boehner get enough in return on entitlement cutbacks? On that score the president has barely budged, but the stock market sure seems to think a deal will be reached.

Please consider Boehner floats 'Plan B' as cliff deadline nears.

House Speaker John Boehner on Tuesday floated a back-up plan to raise taxes on incomes of $1 million and above, even as Republicans and the White House were moving closer to a deal to avert the fiscal cliff.

Dubbed "Plan B" by the Ohio Republican, the proposal was met with immediate pushback from the White House and Senate Democratic Leader Harry Reid, who said it cannot pass both houses of Congress.

The speaker said he remains confident a deal can be done before the end of the year. But he dismissed Obama's latest offer as unbalanced. Boehner said he wants $1 trillion in spending cuts for $1 trillion in revenue.

"That would be my version of a balanced approach," he said.

The only difference between Plan A and Plan B that I can tell is the offer of tax hikes on those making over $1,000,000. Wasn't that hashed out over a week ago?

Concessions From Both Sides

MarketWatch notes concessions, Where Obama and Boehner Have Backed Down

Taxes: Monday night, Obama dropped his long-held insistence that rates rise for incomes of $250,000 and above. The new target: allowing Bush-era rates to expire for incomes of more than $400,000. The speaker is willing to accept higher rates on $1 million incomes and above. Chances are that neither side is done moving toward the other. Could $500,000 be the sweet spot?

Spending: Obama has offered $1.2 trillion in spending cuts, including $400 billion in savings from entitlement programs. That's a $50 billion increase in entitlement savings, but still far from the $1 trillion in entitlement cuts sought by Boehner.

Debt ceiling: Some Republicans had wanted to use the threat of default to push the White House to make spending cuts. But last week, Boehner offered a one-year increase in the debt ceiling as part of a fiscal-cliff deal — as long as it is coupled with corresponding spending cuts. But Obama upped the ante on Monday night, calling for a two-year extension. (He'd originally wanted unlimited power to raise the ceiling.)

Significant Differences

There is a huge gap between $400,000 and $1,000,000 on tax hikes.
There is a huge gap between $400 billion and a $trillion on entitlement cuts.
Boehner wants a debt-ceiling deal to include spending cuts for every dollar upped. Will Obama agree to that if Boehner agrees to a two-year extension?

The gaps that still remain are huge. Nonetheless, the stock market acts as if a deal is at hand. Should there be a deal, a sell-the-news event seems likely.

Assuming there is a deal (and I am still not entirely convinced there will be one), the only market-favorable fundamental is the Fed, and at some point that will cease to work.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Normalized Unemployment Rates; Cyclical vs. Secular Forces

Posted: 17 Dec 2012 11:58 PM PST

Many have heard of normalized P/E ratios based on 10-year earnings averages and the concept of reversion to the mean.

To the best of my knowledge no one has attempted to normalize unemployment rates based on demographic trends, although some have attempted unemployment normalizations based on changing definitions of the meaning of unemployment.

The following participation rate chart defines the problem.

Participation Rate by Age Group

click on any chart for sharper image

The above chart first appeared in my post Boomer Demographics and the Unemployment Rate. It is from a series by reader Tim Wallace. (click on link for rest of the series).

I added trendlines, a vertical black line, and circles to the chart.

Definitions and Notes

The participation rate is the ratio of the civilian labor force to the total noninstitutionalized civilian population 16 years of age and over.
The noninstitutionalized civilian population consists of civilians not in prison, mental facilities, wards of the state, etc.
The labor force consists of those who have a job or are seeking a job, are at least 16 years old, are not serving in the military and are not institutionalized.
There are strict requirements on what constitutes "seeking a job". Reading want-ads or jobs on "Monster" does not count. One actually needs to apply for a job, go on an interview, or send in a resume.
Please see Reader Question Regarding "Dropping Out of the Workforce" for an explanation of how the BLS determines someone is actively seeking a job.

Secular Forces

The trends in purple (age 25-54), and green (age 20-24) up until 1988-1990 or so reflect the entry of women into the workforce.

Starting around 1988 there were abrupt changes in the participation rates of age groups 25-54, 20-24, and 55+. The shift in participation rate of 55+ was especially abrupt. Those shifts reflect baby boomer dynamics.

Structural vs. Cyclical Forces

A second major shift (marked by the black vertical line), was far more sudden, occurring exactly at the onset of the 2007 recession.

The question at hand is whether or not the trendlines at the onset of the recession are still valid. If so there is a pronounced impact on expected participation rates, and therefore unemployment rates (by implication).

It's easy to confuse what's cyclical vs. what's secular because the direction of the 55+ trend did not change in 2007, only the slope changed. The direction did change for age group 55+ in or around 1992.

Participation Rate Discussion

I started work on these ideas much earlier this month with preceding posts as follows:

December 07: Startling Look at Job Demographics by Age
December 12: Questions of the Day: What if the BLS is Wrong About its Labor Force and Participation Rate Projections? How Would it Affect the Unemployment Rate?
December 14: Boomer Demographics and the Unemployment Rate

In the meantime, others have been investigating cyclical vs. secular shifts as well.

For example, on December 13, Andrew Wilkinson, Chief Economic Strategist for Miller Tabak & Co. asked the question How Realistic is the FOMC's Unemployment Forecast?

Wilkinson notes that if the participation rate rises a mere .5 percentage points employers would need to add 181,000 to prompt the Fed to take away the punchbowl by the end of 2015.

If the participation rate were to rise to 65.8 (the average reading since 2000), it would take a whopping 284,000 jobs per month. See my December 12 article for charts on the same lines of thought.

A table I posted in 2009 will show why 180,000+ jobs per month is not in the cards.

Monthly Job Growth 1999-2009

Chart courtesy of BLS. Annotations by me, numbers are in thousands.

The areas in deep blue mark recessions.

At the height of the internet bubble with a nonsensical Y2K scare on top of that, the economy managed to gain 264,000 jobs a month.
At the height of the housing bubble in 2005, the economy added 212,000 jobs a month.
At the height of the commercial real estate bubble with massive store expansion, the economy added somewhere between 96,000 and 178,000 jobs per month depending on where you mark the peak.

Neither the housing boom, nor the commercial real estate boom is coming back. Nor is there going to be another internet revolution. If anything, outsourcing of jobs to Asia is likely to remain intense. Finally, consider all the financial engineering jobs, banking jobs etc, that are not coming back.

Lost Bet

Returning to the present, Wilkinson states "As you can see there are plenty of moving pieces in projecting advances for the labor market. In plain and simple terms arriving at an unchanged unemployment reading through 2013 might require payroll gains of anywhere between 110,000
and 500,000 depending on how many people you want to involve in the labor market."

Yes, I can clearly see that, noting that I lost a bet on it. Although I was certain the participation rate would drop, I never envisioned it would drop this far this fast (dragging the unemployment rate down with it).

For details, please see my October 7, 2012 post Lost Bet.

Where to From Here?

Wilkinson concludes with "In order for the desired unemployment rate to meet the falling projection laid down by the Fed, payroll growth is going to have to start picking up from its present pace. If it does not, the Fed is likely to be highlighting on an ongoing basis the lack of quality in the improving fortunes of the labor market."

Assuming "lack of quality" is the same as "falling participation rate", I am in agreement with Wilkinson.

Indeed, I will go one step further, suggesting the Fed is likely to miss badly even if payroll growth picks up (which I do not think will happen).

Will the Jobless Rate Drop Take a Break?
While pondering my thoughts regarding a bad miss by the Bernanke Fed on unemployment projections, please consider an economic research article by the San Francisco Fed, Will the Jobless Rate Drop Take a Break?

Looking at secular trends, participation grew rapidly from the mid-1960s through the 1990s as women entered the labor force in higher numbers. As women's participation stabilized and baby boomers began to retire, labor force participation leveled off and in the 2000s began to decline. Young people spent more time in school during this period, further reducing participation rates. On the cyclical side, participation has tended to fall in recessions as workers withdrew from the labor force. This pattern was particularly pronounced during the recent financial crisis.

Trend vs. cycle: Is this time different?

Disentangling secular and cyclical fluctuations in labor force participation is never simple, but has been especially difficult lately. Figure 1 shows that labor force participation began to decline well before the Great Recession. This decline reflected, at least in part, the leading edge of the baby boom generation moving into retirement. The decline in labor force participation accelerated sharply during the recession and continued in the early years of the recovery.

The extent and timing of the recent drop in participation have been difficult to interpret conclusively. Many analysts agree that at least some of the recent drop has been cyclical. But they disagree on how much the decrease stems from the weak labor market during the recession and recovery. Estimates of the effect of these cyclical factors range from a third to half the total drop in participation (Davig, Maki, and Newland 2012; Aaronson, Davis, and Hu 2012; Van Zandweghe 2012). Some analysts argue that, when these workers return to the labor force, that will completely offset ongoing downward structural and demographic trends (Stehn 2012).

Will the unemployment rate stall in 2013?

Nearly 6.9 million people report being out of the labor force but wanting a job. As economic conditions improve, it is reasonable to expect that some of these workers will move back into the labor force or join for the first time. Based on historical averages, about 2.1 million of them could enter the job market. These potential entrants will either take jobs directly or join the labor force as unemployed workers actively searching for jobs.

The near-term path of unemployment will reflect both how quickly potential workers enter the labor force and the rate at which jobs are created. Assume that the average pace of job creation over the past two years continues. We can then project the path of the unemployment rate over the next year according to the rate at which the 2.1 million potential workers enter the labor force.

If these workers take a year and a half to join the labor force, which would be about a year faster than the entry rate from 1994 to 1999, the recent decline in the unemployment rate would stall at more than 8% by the end of next year. Suppose though that the number of workers who want a job but are not actively looking falls at a more moderate pace and it takes three-and-a-half years for this group to join the labor force. In that case, the unemployment rate would stay at 7.7% through the end of next year. For comparison, if none of the 2.1 million potential workers were to enter the labor market, the unemployment rate would fall to 7.4% by the end of 2013. Of course, the rate at which these workers join the labor force may reflect the labor market's overall strength. A faster rate of job creation may offset a faster rate of labor force entry, allowing the unemployment rate to fall.

Wilkinson, the authors of the San Francisco Fed article above, and I are all having similar thoughts and concerns regarding the forces in play.

Cyclical Forces at Play

Please consider this chart from my December 7 article Startling Look at Job Demographics by Age.

Note that age groups 16-19 and 20-24 do not register at all in terms of importance.

We can guess whether or not the trend towards more school will continue or even reverse (increased schooling is what is driving the participation rate in those age groups), but what matters is the trend in age groups 55+ and even more so 25-54.

For convenience here is the chart I posted at the top of this now lengthy article.

Of the three green circles, the ones at the top and bottom are the ones of relevance.

Age 55 and Over Discussion

The current (since about 1992) trend in age group 55+ will not continue forever. At some point, perhaps age 75 or so, people will stop working whether they want to or not, simply because they will be physically unable. At what age that will happen is debatable, but it will happen at some point even though overall longevity is increasing.

Thus, some of that trend change since 2007 may be structural, but the rest is cyclical.

Based on the abrupt change at the start of the recession, I suspect most of the trend change since 2007 is indeed cyclical, even though some flattening of the trend should occur later based on physical ability as noted above.

The important point is a return to the trendline will increase the participation rate (even if at a flattening rate over time).

Age 25-54 Discussion

Unlike demographics for students (and the trend for more college education), I see no reason other than an extremely poor job market for the abrupt change in the 25-54 participation rate starting in 2007.

Thus, in this demographic, nearly all of the drop in participation rate is cyclical. And that drop is extremely important as the following table shows.

Population, Labor Force, Unemployment Rate, Participation Rate (Age Group 25-54)

Year 25-54	Civilian Population	Labor Force	CP Employed	Unemployment Rate	PR
2000	121,072	101,797	98,920	2.826212953	84.07972116
2001	121,769	101,891	97,426	4.382133849	83.67564815
2002	122,264	101,568	96,727	4.766264965	83.07269515
2003	123,595	102,627	97,740	4.761904762	83.03491242
2004	123,686	102,638	98,279	4.246965062	82.98271429
2005	124,582	103,363	99,214	4.014008881	82.96784447
2006	125,201	104,317	100,735	3.433764391	83.31962205
2007	125,978	104,964	101,083	3.697458176	83.31930972
2008	125,857	104,787	98,921	5.598022655	83.25877782
2009	125,647	103,748	95,033	8.400161931	82.57101244
2010	125,415	102,964	94,347	8.368944485	82.09863254
2011	124,722	101,720	94,322	7.272906017	81.55738362
2012	124,248	100,977	94,523	6.391554512	81.27052347

The average participation rate for 2000-2007 is 83.3. Let's normalize the labor force and unemployment rate for the average participation rate and check out the results.

Normalized Labor Force, Unemployment Rate(Age Group 25-54)

Year 25-54	Civilian Population	Normalized LF	CP Employed	Normalized UR	Average PR (2000-2007)
2000	121,072	100,852.98	98,920	1.92	83.3
2001	121,769	101,433.58	97,426	3.95	83.3
2002	122,264	101,845.91	96,727	5.03	83.3
2003	123,595	102,954.64	97,740	5.06	83.3
2004	123,686	103,030.44	98,279	4.61	83.3
2005	124,582	103,776.81	99,214	4.40	83.3
2006	125,201	104,292.43	100,735	3.41	83.3
2007	125,978	104,939.67	101,083	3.68	83.3
2008	125,857	104,838.88	98,921	5.64	83.3
2009	125,647	104,663.95	95,033	9.20	83.3
2010	125,415	104,470.70	94,347	9.69	83.3
2011	124,722	103,893.43	94,322	9.21	83.3
2012	124,248	103,498.58	94,523	8.67	83.3

Reported vs. Normalized Numbers

The current labor force for age 25-54 is 100,977,000
The normalized (expected) labor force for age 25-54 is 103,498,000
The current unemployment rate for age 25-54 is 6.39%
The normalized unemployment rate for age 25-54 is 8.67%
Current employment for age group 25-54 is 94,523,000
Normalized (expected) employment for age group 25-54 at an unemployment rate of 6.39% would be 96,884,000
The economy is currently short 2,361,000 jobs (96,884 - 94,523) in this single age group.

At present, the labor force is realistically understated by 2,521,000 minimum and the the economy is currently short 2,361,000 jobs, also minimum.

Making adjustments for this demographic group alone, the overall unemployment rate would be 9.2% instead of the reported 7.7%.

Moreover, and as noted above, I think reversion to the trendine in the second most important demographic (age 55+) is coming as well, except the 55+ trendline will flatten by natural causes (demographic as opposed to cyclical) over time.

Factor in a slight rise in participation rate for the 55+ demographic and the unemployment rate would be close to 10.

How Fast Can We Catch Up?

On a immediate return to the participation rate trendline for age group 25-54 alone, the economy would need to pick up an immediate 2,361,000 jobs
2,361,000 jobs in a single year would be 197,000 jobs per month
Stretching those jobs out for three years until the end of 2015, it would take an additional 65,000 jobs per month just to hold the unemployment rate flat

The key word above is "additional" and it ignores the possibility of a move back towards the trendline for age group 55 and over.

Conclusion

This "normalization" exercise (reversion to the mean demographic-adjusted trendline) shows how small upward changes in the participation rate in age group 25-54 alone will make it near-impossible for Bernanke to hit the Fed's unemployment target by 2015.

The above projections do not even factor in the possibility (I think near-certainty) of a recession in the meantime.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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