El-Erian: GDP, Employment No Longer In Sync

PIMCO's CEO and co-CIO Mohamed El-Erian thinks the continuing deep levels of unemployment are courtesy of the US economy's increased efficiency. Appearing on CNBC's Squawk on the Box this morning, El-Erian addressed the apparent disconnect between changes in unemployment and GDP. "Unemployment has been growing at a pace consistent with a 4 percent GDP print, whereas the underlying GDP print did not even make it to 2 percent." This, El-Erian notes, happens due to the changes in economy that have taken place compared to the Great Depression, when unemployment and GDP moved in locked step. "The economy as a whole is doing what the financial sector used to do," El-Erian says, "which is, at the first sign of a slowdown, you manage very aggressively the cost side. Then, coming out, you realize that you are too lean, and you manage the other way around." "What you are seeing," concludes El-Erian, "is the economy getting, in economic terms, more efficient. This means we get much more unemployment swing than we are used to before." PIMCO's CEO also addressed the "fiscal cliff" he often talks about in terms of US's fiscal policy, where he sees three possibilities: the worst, the best and the likely. "The worst is we let this fiscal cliff happen and the economy is simply not strong enough to overcome it," says El-Erian on the worst scenario. "There is no other omponent of aggregate demand that is strong enough. Next thing you know, the US risks recession" "The best is that our politicians get ahead of that and agree on something that is efficient," which El-Erian thinks is not likely. "So the most likely," El-Erian says, "is that they are going to find a way to push it down the road again, and hopefully during that period the technocrats will agree on a common analysis." That common analysis has been missing, according to El-Erian. "We disagree on how to combine short term stimulus with long term reform, and we need that common analysis." he wraps up his morning chat with Squawk Box