On Friday, financial research firm Lombard Street Research reported that “unemployment could rise above 8% and that profits will be squeezed.”
Lombard Street says its bearish employment and growth projections are the result of a host of factors, including: the 2% payroll tax increase’s drag on retail sales, the ineffectiveness of the Federal Reserve’s monetary pumping, and sequestration–the term used to describe billions in automatic spending cuts set to go into effect March 1st unless Congress acts to change it.
“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,” said Lombard.
The financial research firm says it predicts the sequester will be shifted to cuts elsewhere but that the reduction in public sector spending will weigh down GDP growth.
“Our assumption is that the sequestration is canceled in favor of further cuts in a new provision. But this means the contribution from public spending to GDP growth could well be more negative than the past -0.4 percent,” says Lombard.
The official U.S. unemployment rate is 7.9%. Last quarter, the U.S. economy grew at -0.1%.