Oct. 5 (Bloomberg) -- Mohamed El-Erian says economists are wrong to dismiss unemployment as merely a lagging indicator, a sign of where the economy has been. For the chief executive officer of Pacific Investment Management Co., the 26-year high jobless rate is also an omen of things to come.     The climb in the September rate to 9.8 percent, double the level at the start of last year, leaves the U.S. saddled with about 15 million people out of work and with limited prospects. That will further hurt the housing market and weigh on the wages of those still employed, threatening to undercut the economic recovery, according to Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania.

“Today’s unemployment rate is much more than a lagging indicator,” said El-Erian, whose Newport, California-based Pimco manages the world’s largest bond fund, in an e-mail after the Labor Department report on Oct. 2. “It is also a signal of future pressures on consumption, housing and the country’s social safety net.”

The job market tends to trail the economy in a recovery because companies hesitate to take on more workers until they are convinced the expansion will last. What’s different this time is the “large and protracted” rise in joblessness and the likelihood that it will stay high for years, according to El- Erian. That means unemployment will affect the economy going forward, not merely reflect where it has been.

Less Credit, Fewer Jobs

El-Erian, 51, sees the U.S. entering what he calls a “new normal” -- a sustained period of annual growth of about 2 percent -- as Americans adjust to a world where credit and jobs are less plentiful. In the five years before the recession began at the end of 2007, gross domestic product expanded at an average annual rate of 2.8 percent.

The struggle to generate jobs means the Federal Reserve will keep its benchmark interest rate near zero through next year, according to Bruce Kasman, chief economist at New York- based JPMorgan Chase & Co.

“Joblessness will be the number one public policy problem for 2010,” added Allen Sinai, chief global economist at Decision Economics in New York. “The Democrats could get hurt by that in the November Congressional elections.”

The September numbers were “wall-to-wall ugly,” said Chris Low, chief economist at FTN Financial in New York, in an e-mail to clients. Payroll cuts accelerated to 263,000 from 201,000 in August.

Dropping Out

Unemployment would have topped 10 percent if not for the more than half million Americans who left the workforce. Long- term joblessness -- the percentage of the unemployed out of work for 27 weeks or more -- rose to a record 35.6 percent, or 5.4 million Americans.

“I’ve never seen anything like this in terms of the severity and the broadness of recessions,” said Gary Butler, chief executive officer of Roseland, New Jersey-based Automatic Data Processing Inc., which manages payrolls for one out of every six workers in the U.S. The 62-year-old executive added in an interview that the economy will probably recover more slowly than in past rebounds.

Even before the job figures, Fed Chairman Ben S. Bernanke told lawmakers on Oct. 1 that economic growth next year probably won’t be strong enough to “substantially” bring down the jobless rate, which may remain above 9 percent at the end of 2010.

Lawrence Summers, director of President Barack Obama’s National Economic Council, said the country faces “critical economic problems” and also indicated the job report didn’t tell the whole story.

‘Experience Suggests’

“Employment and unemployment, economic experience suggests, is a lagging indicator,” he told a forum in Washington on Oct. 2.

The last recovery started in December 2001; unemployment didn’t fall until five months later. In 1991, the expansion began in April and the jobless rate fell briefly in July, only to resume rising into the next year.

While Sinai said the unemployment rate this time will again lag behind the recovery, which probably started in the third quarter, he agreed with El-Erian that the distress in the job market was also saying something about the future.     “We have an army of unemployed,” Sinai said. “That’s telling us a lot, in a leading way, about the picture for the consumer.”

Wages, Bankruptcies

U.S. consumer bankruptcies rose past 1 million through the first nine months of the year, the highest since 2005 changes to bankruptcy laws.

Employment expenses in the U.S. -- both wages and benefits -- increased at a record low year-on-year rate of 1.8 percent in the second quarter after a 2.1 percent increase in the first, as the high jobless rate held down worker compensation, according to an index compiled by the Labor Department.

Retailers are pulling back before the holiday sales season. U.S. retail job losses jumped to 38,500 in September from 8,800 in August as car dealers and other stores cut payrolls.

Mattel Inc. and Hasbro Inc., the world’s two biggest toymakers, are shifting toward lower prices this holiday season as budget-conscious parents seek bargains.

Eighty percent of El Segundo, California-based Mattel’s toys will cost less than $30 this year, compared with 75 percent last year, brand President Neil Friedman said in an Oct. 1 interview. Pawtucket, Rhode Island-based Hasbro is concentrating more on toys under $50, said John Frascotti, chief marketing officer.

More Foreclosures?

Housing, which has traditionally led the economy out of recession, may also be hurt as the continued rise in unemployment boosts foreclosures, Zandi said. He sees home prices resuming their downward slide, after jumping by the most in almost four years in 20 U.S. cities in July, as the jobless rate rises to 10.5 percent in the middle of next year.

Mortgages 60 days or more past due climbed to 5.3 percent of loans through June 30, up from 4.8 percent on March 31 and 3 percent a year earlier, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said on Sept. 30. First-time foreclosure filings fell 0.4 percent from the first quarter, helped by Obama’s loan-modification program, according to the two government bank regulators in Washington.

U.S. homebuilders will have operating losses of more than $500 million in 2010 as mounting foreclosures and unemployment further erode home prices, Moody’s Investors Service said in a Sept. 30 report. The New York-based bond rating company extended its negative credit outlook for the industry for the next 12 to 18 months, meaning Moody’s may lower the builders’ debt ratings.

Housing Woes

Banks, including New York-based JPMorgan, Charlotte, North Carolina-based Bank of America Corp. and San Francisco-based Wells Fargo & Co., will also be hurt as housing’s woes lead to more loan losses, said Dirk van Dijk, director of research for Zacks Investment Research Inc. in Chicago, in an Oct. 2 e-mail to clients.

The depressed job market may take its toll on politicians. Democratic lawmakers in the House of Representatives are particularly vulnerable if voters blame Obama for a sour economy, according to Nathan Gonzales, political editor for the Rothenberg Political Report in Washington, in an interview.

Since 1945, the party that controls the White House has lost an average of 16 House seats in a president’s first midterm election, according to the Cook Political Report. Obama’s Democratic Party currently has 256 seats in the chamber, compared with 178 for the Republicans.

The House approved legislation last month that would extend unemployment benefits by 13 weeks for people in 27 states with jobless rates of at least 8.5 percent in August. The Senate is considering the measure.

“It’s very important for policy makers to remain very aggressive,” Zandi said. “The severe stress in the job market is the most significant threat to the nascent recovery.”

To contact the reporter on this story: Rich Miller in Washington rmiller28@bloomberg.net

Last Updated: October 5, 2009 00:00 EDT