Viewpoint: Why should Asia worry about US unemployment?

People protesting against job losses High rates of unemployment have dented consumer confidence in the US and hurt demand

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Across key cities in Asia, the casual observer would be forgiven for thinking that all is well with the world.

Airports, hotels and shopping malls bustle with activity as domestic demand continues to boom.

The reason is simple. Household spending is supported by high rates of employment. When people have jobs, they have a regular income source which gives financial security, and hence they spend more.

Asian economies are doing very well on that count with unemployment rates in the region either falling or at record lows.

An ocean away, however, the US labour market struggles with persistently high joblessness, as underscored by the dismal jobs report for August as published by the government last week.

Given the huge size of the US economy, this begs the question: "How or when could the languishing US consumer become a problem for Asia?"

From spenders to savers?

To understand this we need to examine the US unemployment situation in detail.

The current unemployment rate in the US is 9.1%. In addition to this being a very high figure by historical standards, the average duration that an American worker is without a job has surged to about 40 weeks.

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The impact of a slowdown in consumer spending in the US will be felt by the factories in China, Japan and South Korea”

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Previous economic cycles have seen the average number of jobless weeks swing between only 10 and 20 weeks.

The current 40 weeks is very worrying, as it raises new doubts over the longer-term role of the US consumer in general.

When someone is out of job for such a long time, their bills and other debt obligations are likely to accumulate. So when they do eventually find regular work, they are going to have to pay off those bills rather than go and spend money. That hurts consumer demand.

Even if the newly employed do not have huge debts, they are more likely to head to the bank teller with their pay cheques rather than the neighbourhood shopping mall.

The long duration of unemployment has got those with a regular job worried as well. People worry that if they lose their job, it will take them a long time to find another one. So even those with a regular income source may feel the need to cut back on their spending in order to save for the rainy day, should one arrive.

To make matters worse, the labour report for August highlighted that those workers in a job are working shorter hours, which indicates that while they may still be employed, they are probably making less money that they used to.

Worried Asia

Unemployment: US vs Asia

  • United States: 9.1%
  • Taiwan: 4.3%
  • Hong Kong: 3.4%
  • South Korea: 3.3%
  • Malaysia: 3%
  • Singapore: 2.1%

Source: Julius Baer

All in all this is likely to drive people towards saving more and spending less, which is not a very encouraging backdrop for Asia's export-dependent economies.

The US, for all its economic problems, is still the world's largest economy and the biggest market for most Asian countries.

For years an unending appetite for goods, coupled with deep pockets and a sense of financial security, saw shoppers from New York to Houston to San Francisco lap up goods made in Asian factories.

However, high rate of unemployment coupled with fresh fears that the US may be slipping back into a recession has seen confidence dip - and that is likely to hurt consumer demand.

The impact of a slowdown in consumer spending in the US will be felt by the factories in China, Japan and South Korea. The fewer goods consumers in the US buy, the lower will be the output in Asian factories exporting to the US.

Economies that have large export sectors, such as South Korea and Taiwan, have seen their corporate profits forecasts be downgraded as investment analysts worry about future sales.

Weaker demand may ultimately result in fewer jobs in Asia as companies produce less for export. That in turn would hit domestic demand within these countries and create issues similar to those that the US is facing right now.

Just how worried the markets are about the potential impact can be gauged from the response of the stock markets, which have recently fallen sharply across Asia.

Looking at the world today, it seems unlikely that the shocks of 2008, where the global economy - including much of Asia - went into a synchronised slowdown, will be repeated.

Nevertheless Asia is unlikely to remain immune from a sluggish US economy either.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent, professional advice for your own particular situation.

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