Consumer Spending: Cut Through Unemployment

"Chrysler to Shut Delaware Plant a Year Early, Drop Shift at Ohio Factory"

"Goldman May Slash 3,200 Jobs, 10% of Workforce, as Credit Turmoil Worsens"

Not to drive this idea into the ground, but headlines like these (which we see with great frequency these days) show that the unemployment reading of 6.1% will soon be very understated. Nouriel Roubini, who is becoming a more vocal and recognized economist of late, has predicted that unemployment may top 8% before the end of the recession. Besides the obvious downside of people not having jobs, it is important to remember that our historically forceful consumer has been able to exist partly because of low rates of unemployment:

Click to enlarge

Notice that the 2001 recession did not have much of an impact on consumer spending; however the last recession driven by a housing crisis, in 1990-1991, did...

Comments

[investor88:]

Good article with supporting facts. Looks like stocks will be a better buy when we see unemployment at 8% since Roubini says this should be peak unemployment rate. Historically, stock markets reverses together with decrease in trough unemployment.

Economists are looking a bigger job loss for October maybe 150k-200k. No time to be calling for a sustained rally with job loss trend pointing down. Wait for this trend to point up, but it may take quite a few quarters.

2008 Nov 02 08:19 AM

[Ridgeway:]

I would only add that, in addition to low unemployment, the wealth effect (driven primarily by home values) was a significant factor in the continued spending during the (short) 2001 recession, something we should clearly not expect this time around.

2008 Nov 02 10:50 AM

[Moon Kil Woong:]

The unemployment rates in the 90's are different than today and even worse when comparing to the 70's and 80's. About 4% of the unemployed aren't documented anymore. The reality is real unemployment is about 10% now not 6% and unemployment didn't really drop that much in the 2000's.

The gorvernment has figured out how to fudge the statistics in unamployment, inflation, and since they had a hard time fudging the money supply they just dropped M3 statistics. Monkey can't see, or hear, nor speak anything bad. So do you believe everything is fine and dandy?

2008 Nov 02 11:20 AM

[Joshua Lacey:]

It's such an economical catch-22, tighten the belt, less spending=more jobs lost.

2008 Nov 02 12:38 PM