For some, the economy has not fully recovered until the unemployment rate is “back where it was” when the economy was booming. Unfortunately, there are key issues with this notion.
The booming economy was built on a housing and stock market boom that is widely agreed to have been unsustainable. Banks and mortgage lenders employed millions to process loan applications to an equal number of borrowers. A sampling of the banks and lenders that went out of business due in the period from 2006 to the present can be found at Implode-O-Meter.com. Due to the housing collapse, the collateral damage outside of the housing finance industry has been wide and deep.
While low unemployment is ideal, achieving an unemployment rate similar to the 2006 or 2000 low seems to require a fleeting boom that is likely to end with dire economic consequences and unnecessary government outlays.
According to Dow Theory, expectations of how low unemployment should go are far more reasonable without the requirement of a economic boom that is followed by a bust. According to the chart of unemployment below, the most realistic scenario for how low the unemployment rate could go is 6.9%.
Applying Dow Theory’s 50% principle suggests that the best we could expect for the unemployment rate, on the downside, is for 6.9%. It is important to understand that the 10% and 3.8% unemployment rates are undesirable scenarios. The 10% unemployment rate is in the depths of a “recession” and the 3.8% unemployment rate at the height of a overextend economic boom.