How High Will Unemployment Go?

Last week markets received some pretty ugly news related to employment, or the lack thereof. ADP came out with its estimate of nearly 700,000 jobs lost in December. The Bureau of Labor Statistics released their non-farm payrolls report which included job losses of 524,000 and an unemployment rate hitting 7.2%.

Big numbers but what do they mean? And how do they compare to unemployment in previous downturns? I'd like to share with readers the following two charts from Citi's "Comments on Credit" that provide some interesting comparisons.

Citi has looked at job losses over time starting at the cyclical peak of the stock market prior to each recession. It has plotted this data for the current recession and compared it to the same data for several earlier recessions. They have further differentiated between "mild" recessions and "deep" recessions.

Job losses

This first chart shows job losses. Our current recession is the blue line. Note that it is showing more job losses than the previous "deep" recessions. On the other hand, it seems right on schedule in terms of hitting an extreme level about 13 months after the peak.

An optimist might look at this chart and determine that we should be on schedule to see job gains soon, much as we experienced in previous "deep" recessions. Unfortunately, most observers are expecting job losses to continue through the rest of this year, causing the blue line to dive deeper to the downside. Employment is only anticipated to begin to recover much later in 2009 or in 2010.

Unemployment

This next chart shows how the unemployment rate changed from its starting level at the peak of the stock market over the course of the recession. Again, our current recession is the blue line.

In comparison to the line designating a "deep" recession, we see that unemployment had already starting slowly increasing a full year prior to our most recent stock market peak and has been accelerating for the last six months. Extrapolating from what we see in this chart, if our current recession is only as bad as previous "deep" recessions, we could expect to see unemployment top out just shy of 9%. That is in the ballpark of what many observers are predicting: peak unemployment of 9% to 10% during this cycle.

The big "if"

It is unlikely that a new bull market can start until investors see that the unemployment rate is stabilizing and beginning to decline and that monthly job losses are moderating. If this current recession can be considered to be similar to past "deep" recessions, we may only have a few more months of extreme pain. The big "if" is whether this recession will be worse than other "deep" recessions.

Unfortunately, the consensus seems to be that this recession, by most measures, will be deeper than previous ones. The global nature of the downturn, the collapse in housing and manufacturing, the devastation in the financial sector and, as described here, the growing problem with unemployment, all point to a recession that promises to be worse than what Citi considered as "deep" in their analysis.

So the big "if" is looking more like the big "long shot" at this point. Better keep your fingers crossed.

Comments

[CJJ:]

Wow an article that uses the word 'if'...a pleasent surprise. It's nice to see someone presenting unbiased facts and leaving the reader to come to their own conclusions.
I'd expect to see a few SA articles on the same subject over the next days, weeks, months taking the 'if' out of things and telling you exactly what will occur. Except they will all differ on their future tellings.
People can't tell the future. Right now the trajectory is down and down fast, however that can continue or it can change. If indeed, if indeed.

Jan 14 10:12 AM

[MarvinMBA:]

We are now in a DEPRESSION and not a recession. This is going to be more like the 30's as I remember growing up in the West Side of Chicago and we were all living togeather under one roof...three generations under one roof as jobs were lost, banks failed and real estate was abandoned and empty and my prediction is that were going to see that all over again. Its going to be years before we pull out of this mess mostly given to us by our own financial system as was the last Depression.....MarvinM...

Jan 14 10:33 AM

[Eric Rasbold:]

Today's retail will not help any. More spiraling of the sector and the labor involved. Soon, everyone will work at Wal Mart!

Jan 14 11:03 AM

[ChickenLips:]

Why do all these analysts expect a recovery in a couple of months? For the past year, we have been reading articles just like this one, all we need is a "couple of more months to recover". This recovery will take years and requires long-term planning, I hope Obama's administration is effective in their long-term execution. But it appears to me that this administration is going to be yet another conservative disappointment. Same ol' BS.

Jan 14 11:20 AM

[hoover:]

I was born in the middle of the depression. Some people in the town I'm from NEVER had a job, and got by only by doing a few side jobs. They had families to support. Farmers were wiped out; their crops were worth little IF they could even sell what they produced, and the proceeds wouldn't pay for the cost of the previous year's crops. The current recession seems more ominous than ANY of the cyclical recessions we have had since the thirties. The asset price drops, enormous U.S. debt, and the government that doesn't have a clue what to do, are all parallels with the thirties. A change in administrations in 1932 (Hoover out, Roosevelt in) didn't really change much except Roosevelt created more optimism which helped a little. WWII began to change everything because the government in effect nationalized most industry to produce war goods, men were taken out of the unemployment lines to serve in the army, and good paying civilian jobs became available. One difference between today and the thirties is that government already sends out trainloads of money each month for social security, medicare, unemployment, defense contracts and payments to other entities too numerous to mention. That may help this time around.

Jan 14 12:16 PM

[Prudent Man...:]

You bought a large pizza and your were given a small one. The economic pie decreased because it was built on a pyramid of credit.

When the ramifications of this, then someone can make WAGs as to the future. No Prophet am I or anyone else.

Jan 14 12:34 PM

[Prudent Man...:]

Senior Moment: When the ramifications of the economy's size decreasing because of the credit pyramid collapsing, then we will, hopefully, more transparency as to which investments will work.

Until then, keep it cool

Jan 14 12:42 PM

[socrateazz:]

You must tempor your unemployment number by the way it is calculated today. If you use the same statistical method they used in 1971 or 1981 you would be beyond the numbers you are looking at, I expect between 10% and 15% is the current range that would be comparable... But it is just my guess

Jan 14 01:03 PM

[Sentinel:]

We will only get a clear (or clearer) picture of this if we start comparing apples to apples. This 7.2% figure is NOT ENTIRELY correct. Part of the way the Clinton Administration "proved" they were coming to the rescue from the Bush the Elder recession was to redefine was it meant to be unemployed. They only counted those who made an initial claim for unemployment. But those who just quit looking or went to stay with Mommy or Daddy or went back to school were counted but NOT REPORTED. Same for laid off executives or NASA engineers who were now flipping burgers part time. This was how WE USED to figure unemployment. This is how we got the 25% unemployment figure that all the CNBC blowhards still use to show us that IT AIN'T THAT BAD OUT THERE!

But these statistics are still collected. All you have to do is go to the BLS and compute them for yourself. And if you do then our "unemployment" rate as figured like the Depression years stands at over....

18%.

That's right. 18%. If you don't want to go that far, then just look at U6 figures from the BLS and it stands at 13.5%.

Also not reported but is still felt in the real world is how long it is now taking someone to get reemployed. Just like housing inventory, there are now a surplus of workers scrambling for a smaller and smaller share of available jobs.

So don't tell me there are help wanted signs everywhere. Instead of the usual 10-20 applicants for that job there are now 100, 200, 500, 1000 applicants for that one measly job.

That's why state unemployment compensation servers and computers nationwide are crashing from all the load being put upon them.

Please....if anything else...stop believing that 7.2% U3 number reported by BLS and distributed by the government and the news agencies. It is definitely NOT THE WHOLE PICTURE!

Jan 14 01:05 PM

[Socialism c...:]

You may want to consider that entitlement government and socialism are part of the CAUSE of this mess...not part of the solution!! We wouldn't be in this situation if government and we, the people, only spent what we had in pocket! Big government is always the problem, not the solution -- the real answer is massive tax cuts. Then consumers regain control over their own money; businesses can afford to keep employees, etc. Government should get the hell outta the way...their fingers in every pie only ruins the pie!!!


On Jan 14 12:16 PM hoover wrote:

> One difference between today and the thirties is that
> government already sends out trainloads of money each month for social
> security, medicare, unemployment, defense contracts and payments
> to other entities too numerous to mention. That may help this time
> around.

Jan 14 02:37 PM