U.S. Unemployment: Is Media Hype Missing the Point?

Ten million unemployed, the worst in 26 years is heard over and over in the media. Well yes, the current number of unemployed people has not been this high since 1982 when it reached 10.7 million and the unemployment rate was 9.7%, the highest since 1970 as shown on the following chart:

As of November 2008, the unemployment rate stood at 6.7% and the year is not over. The following chart compares the 1982 peak and the present.

The U.S. labor force has increased 38% since 1982, and the population has increased 32%. The unemployment rate has exceeded 6.7% thirteen times since 1970. Today, a 9.7% unemployment rate would be associated with an approximate 50% increase in the number of unemployed people, or about 5 million.

New York Times alludes to the real story, with its lead front page story on December 21, 2008 “Obama Expands Recovery Plans As Outlook Dims.”

"The recovery plan would seek to create or save 3 million jobs in the next two years, up from a goal of 2.5 million last month. The new job target was set at a meeting last Tuesday. Advisors presented information about previous recessions to establish that the current downturn was likely to be “more severe than anything we’ve experienced in the past half-century” according to an Obama official familiar with the meeting”. What was presented at the meeting? It is likely that the presentation included the following information.

The Real Story

What has caused the gravest concern in the government and among economists is not the number of unemployed people but rather the unprecedented increase in the unemployment rate in the first year of a recession, confirmed by the November numbers, as shown on the following chart.

In the first 11 months of 2008 the unemployment rate increased 210 basis points, from 4.6% in 2007 to 6.7%. In all prior recessionary cycles since 1970 (1974-75, 1980-82, 1990-1992, and 2001-03), larger unemployment rate increases followed in the second or third year. Absent highly effective government intervention, we are in for one bad ride.

Comments

[HiSpeed:]

Good article. Unemployment going to double digits.

Stock market 5000s coming to a ticker-tape near you in 2009!

2008 Dec 22 10:33 AM

[herbert hoover:]

You mean unemployed people don't want i-Phones? Why not?

2008 Dec 22 10:44 AM

[Haigh:]

" highly effective government intervention"

Isn't that an oxymoron?

After all isn't our government responsible for the largest Ponzi scheme in the history of the free world, Social Security ?

2008 Dec 22 11:19 AM

[NaiveOptimist:]

I'll go out on an optimistic limb here, but isn't it possible that businesses reacted much more quickly to this recession than to others and laid off an appropriate number of people in the first year so that deeper cuts can be avoided in subsequent years?

It was commonly accepted that the financial crisis would lead to an economic crisis and that demand would diminish. Instead of a slow build up of inventory signaling a recession and a late recognition that companies were overstaffed, companies cut early and deep. For instance, experiences with the dotcom bubble caused a large number of tech companies and startups to let go of people very early in this cycle to conserve cash.

I know we're in a negative feedback cycle where layoffs lead to more layoffs, but I'm inclined to believe that each subsequent round (in the US) will be a little smaller than the preceding over the next couple of years.

2008 Dec 22 11:20 AM

[Jason Rines...:]

Correct on general analyis (things move faster due to technology and free flow of information), believe that this level of layoffs per month will continue for 2 to 3 more quarters however. That is the completion of the 1st leg down and the dramatic shift from Efficient Market back to Save and Invest.

I forecasted here at SA -20 GDP total in March 2008 by 2011. 10% has now come off and will be reported by Q3 of 2009. Goldman Sachs anticipates -5% this quarter, -2 1st quarter and -1 Q2 2009.

-2% GDP is where we were at even with all the stimulus by Q3 of this year. The Fed is fighting the second -10% GDP leg down as we speak. We can expect a big dead cat bounce in 2009, or a longer bear rally. History shows this has happened in every deflation event in the U.S. since the 1840's. Perhaps the trend is not our friend this time, but I am will buy and hold for five years at the end of Q1 in certain sectors. The end of the Q1 earnings release will provide me a pretty clear map who will have the cash flow to survive and thrive and whom won't Washington picking market winners and losers will weigh into that equation.

The Fed lost round one on asset deflation. But the real question is this: Does the Central Banking system really want inflated assets? They already made there killing on the boom cycle, it's now becoming buying season on the bust, followed by a new bull in 2013. Cheap labor is also viewed favorably for a few. What happened to the TARP money? It went to secure Central Banking investments and begin the next cycle of buying cheap financials in the bust. Those facts are now common knowledge (banks that got TARP beginning acquisitions).


On Dec 22 11:19 AM Haigh wrote:

> " highly effective government intervention"
>
> Isn't that an oxymoron?
>
> After all isn't our government responsible for the largest Ponzi
> scheme in the history of the free world, Social Security ?

2008 Dec 22 05:49 PM

[raising4dau...:]

You are definitely correct, not out of a limb. Technology and better management methods are providing better and more responsive capacity (human resource) and inventory planning tools. Wholesale and retail inventories are going through the floor, and not just due to a lack of credit. Better systems and methods allowed companies to respond to the downturn much more quickly than in the 1980, 1990, or 2001 recessions. The adjustment will be similar to past adjustments in depth, just quicker.




On Dec 22 11:20 AM NaiveOptimist wrote:

> I'll go out on an optimistic limb here, but isn't it possible that
> businesses reacted much more quickly to this recession than to others
> and laid off an appropriate number of people in the first year so
> that deeper cuts can be avoided in subsequent years?
>
> It was commonly accepted that the financial crisis would lead to
> an economic crisis and that demand would diminish. Instead of a slow
> build up of inventory signaling a recession and a late recognition
> that companies were overstaffed, companies cut early and deep. For
> instance, experiences with the dotcom bubble caused a large number
> of tech companies and startups to let go of people very early in
> this cycle to conserve cash.
>
> I know we're in a negative feedback cycle where layoffs lead to more
> layoffs, but I'm inclined to believe that each subsequent round (in
> the US) will be a little smaller than the preceding over the next
> couple of years.

2008 Dec 22 10:47 PM

[Stephen Kanitz:]

Oops. But only 60% of income is employment related today , compared to 85% in 1929, compared to 75% in 1970. See my article.

seekingalpha.com/artic...

2008 Dec 23 10:03 AM

[y3115y:]

I am against every dollar spent on bailout, it should be used to create jobs. Unployed people should be sent to work, from growing tomatos to make T shirts. People must have job, and income to spend making the economy alive again. The bailout money spent has not create a lot of jobs yet.

2008 Dec 23 10:13 PM

[thatguy57z:]

the tax payer is not going to get nothing, Until all the big company's get all the money they lost. And its coming out of your pocket and mine. it cost money to create jobs. the trap money was to help the tax payer. just another way to use us to get more money from use.

2008 Dec 24 03:26 AM