When Unemployment Peaks, The Bottom Should Follow

Another monthly employment update, another dismal report. So it goes in a vicious recession. The only question: When will it end?

We take a stab at some perspective below, but first let's recap Friday morning's ugly numbers. Last month suffered another sharp fall in nonfarm payrolls, the U.S. Bureau of Labor Statistics reports. The economy lost 651,000 jobs in February — the 14th consecutive month of payroll declines and the third month of losses above the 600,000 mark. In this year's first two months alone the economy has already shed nearly 1% of total nonfarm payrolls. Unfortunately, the outlook for March doesn’t look good either.

That brings us to the burning question: When will this nightmare end? We don't have the answer, nor does anyone else. That said, a fair reading of the economic data, including a review of past recessions through history, suggests that the bleeding will go on for some time. That's just a guess, of course. Can we do better than simply guessing?

Perhaps. One small effort on that front comes by considering the trend in initial jobless claims, which is a leading indicator of sorts in that it previews the state of the economy in the immediate future. If more workers file for jobless benefits today, the ranks of the unemployed next month will reflect the fact in official jobless tallies.

Looking to the trend in initial jobless claims offers some perspective on how the cycle is unfolding and where we are in the current cycle. Let's start by looking at the four-week moving average of weekly jobless claims from 1967 through yesterday's update, which shows that weekly claims fell substantially to 631,000 for the week ended February 28, 2009. That's a step in the right direction, but anything over 600,000 clearly suggests the recession fires are still burning hot.

But looking at jobless claims numbers alone can be misleading because the size of the labor pool changes through time. Generally, nonfarm payrolls expand, even if recent experience tells us otherwise. Nonetheless, over the long haul, the labor force increases, at least it has over the long stretch of history in the U.S. As such, we need to look at jobless claims in context with current nonfarm payrolls through time, as we do in the next chart.

Putting jobless claims into perspective with the overall level of nonfarm payrolls suggests that initial jobless claims will peak before the recession end, or at least peak as the recession ends. That's potentially valuable information if you consider that the official notice that the recession has ended won't be coming for many months after the fact. That leaves us to look for other indicators in real time, and initial jobless claims are on the short list.

In the past six recessions, the four-week moving average of weekly jobless claims as a percentage of current nonfarm payrolls peaked either in the month the recession formally ended (as per NBER) or the month directly ahead of the recession's formal end. By this measure, in just one case since 1969 did the jobless claims peak arrive much earlier: the 1969-70 recession ended in November 1970; the jobless claims peak came in May 1970.

Where does that leave us currently? The latest bar on the far right-hand side in the chart above is simply the latest batch of numbers. The four-week moving average of initial jobless claims through February 28, 2009 represents 0.48% of last month's total nonfarm payrolls. History suggests that we have a ways to go before the employment pain ends. That forecast is based on the following: The high point for the past 40 years is 0.75% in 1982 — well above the current 0.48%. Adjusting for the fact that this is likely to be the worst recession since the Great Depression implies that we might go to well above 0.75% this time.

In short, there's more pain to come, or so we expect. We're probably beyond the halfway point in this process, although there's still too much uncertainty to say for sure. Perhaps we'll see some concrete evidence, one way or the other, in the coming months. But for the moment, the economy continues to bleed and there's not much reason to expect an imminent end to the pain. The recession, in short, roars on.

Comments

[Don-n-ABQ:]

Many of you readers are NOT paying attention to what the author is trying to tell you.

The Overall Unemployment Rates (OUR) and the Initial Jobless Claims (IJC) are TWO different things!

IJC peaks near wear the market bottoms in the recessions of 1980, 1990, and 2000.

That being said, "it is different this time." In those last three recessions technology was standing there ready to lead us with job creation out of the recession. Think about this for a minute:

"How many companies did not exist (or were babies) in when Apple (1976) and Microsoft (1975) were founded?"

Millions.

The microprocessor lead us out of the 1980 recession, the mobile communications market (cell phones - phase one) and the software revolution lead us out of the 1990 recession, and the Internet (sans the 1999-2000 bubble) and mobile comm & technologies (digital cell phones & new devices - phase two).

QUESTION: How many jobs were created by technology companies since 1977? Hewlett-Packard, Cardinal Health, Dell, Microsoft, Sprint Nextel, Intel, Best Buy, Ingram Micro, Cisco Systems, Comcast, Apple, Tech Data, Electronic Data Systems, Express Scripts, Oracle, DirecTV Group, Google, Computer Sciences, L-3 Communications, Sun Microsystems, Texas Instruments, EMC, Circuit City Stores (OOPS), Medtronic, Jabil Circuit, DISH Network, Sanmina-SCI, Applied Materials, Automatic Data Processing, Qualcomm, Alltel, Boston Scientific, First Data, Clear Channel Communications, Yahoo, Cablevision Systems, Becton Dickinson, Embarq, Advanced Micro Devices, Charter Communications, Affiliated Computer Services, Micron Technology, Western Digital, Agilent Technologies, SunGard Data Systems, Lexmark International, Telephone & Data Systems, (OfficeMax, Staples, Office Depot, GameStop, etc.)

Should I stop now?

The point is there was always something there to step up and fill the gap. But, this time there was nothing standing there in the wings. These are next, but were not ready for mass-job creation:

1) Nanotechnology
2) Renewable Energy
3) Stem Cell and new Microbiological Research
4) Off Site Data Storage and Computing (the latter is Cloud Computing)

The last two, while they might be two of the "next big things," might never create a mass amount of jobs. The last will just be a shift in jobs from on-site to off-site. The first two will create a mass amount of jobs, but not away. #2 is close, and will be government-ally accelerated by the Obama Administration.

Had not the greedy bankers led us down the path of destruction, and derailed the economy, the first two might have been ready for the next recession.

So, this is not 1980, 1990, or 2000. The tech industry was not quite ready on deck to take off their red-shirt and get into the game. This time it is a multi-pronged fork: 1) housing, 2) the bank, 3) manufacturing, & 4) even technology is laying off. No industry group is safe.

The problems with the auto industry that came at them in the 1970s from Japan and Germany, technology and the labor unions, were put on hold due to technology advances. (Some of you on here might not remember the 1970s?) But, the labor issue can not longer be ignored. The amount of wages and pension funds was already high, and nearly bankrupt the Big 3 back then. Now add health care to the mix and it is at least one-third worse (if not more) this time.

Additionally what happened in the 1970s with the transportation industry? Airlines were deregulated, the trucking industry was deregulated, the rail industry (because of deregulation, high fuel costs, the labor unions) almost went completely broke. ConRail and Amtrak sound familiar?

1) Railroad Revitalization and Regulatory Reform Act of 1976
2) Airline Deregulation Act (October 24, 1978)
3) Staggers Rail Act (signed October 14, 1980)
4) Motor Carrier Act of 1980 (signed July 1, 1980).

So, do not even bother looking at the recessions of 1980, 1990, and 2000. The only guides to this recession are 1970 and 1930. And my guess is that we will land somewhere in the middle of those two. Worse than 1970, but not as bad as 1930. The Obama Administration will use FDR's New Deal as a model for creating jobs in Renewables and the Smart-Grid / Net-Grid Positive industries. (If he and his buddies is smart.)

So, there is a LOT more pain to come. The government will over stimulate, and in combination with low commodity output/rising BRIC demand, will cause rising inflation for the next decade. If you have any money left short the Treasuries and buy the TIPS.

Bottom line:

We may see a "double-top" in Initial Jobless Claims (IJC). One from the first problem of bad loans/bad banks and another one from manufacturing/transpor... Which means: "Bear-Trap." We had one each in October and November. But, my guess is GM & friends will really hurt us in the second quarter. That means after that wave of IJCs, we may finally pore a floor. I am going to say that this summer will be the bottom, if and after we have at least one more trap. At which point capitulation will occur and be done.

We have not seen enough paid yet. Too many $5 coffees are still being purchased. (Maybe there should be a $5 coffee sales chart?) Of course this indicator can be fooled and manipulated by the Obama Administration.

Just like technology bailed out Ronald Reagan's butt in the 1980s, and then Bush's in 1990 and 2000, Obama maybe able to crank up the printing presses, create jobs in Renewables and the Smart-Grid / Net-Grid Positive industries, and push the inevitable off for another administration down the road. Dividend payments on the deficit and national debt to be paid later.

Mar 07 05:55 PM

[Lucmee:]

The stimulus will kick in... But will not be enough to sustain a recovery.

Given the population densities involved (just in North America, mind you)... The only way to put immediate, sustainable money into consumer's pockets is to create manufacturing jobs for low end consumer products. This will require bringing back a whole passel of the jobs that never should have been shipped overseas in the first place.

Trying to exist within a service and investor type economy was the height of madness. The old communist saw about selling the capitalists the rope that they would use to hang themselves has come all too true. Greed and corruption has decimated the middle class to the point that they can't sustain themselves ...Let alone the national (and by osmosis, global) economic scheme.

The options are quite simple at this point:

1. Reduce the population by 75% (unthinkable)
2. Go into full on protectionist mode. (untenable)
3. Endure a decades long depression which will ultimately achieve options one and two.

Oh yeah... There is one more option:

4. Massive international cooperation on energy, infrastructure and economic practice reforms with an unwavering goal of creating a vibrant global middle class capable of generating enough churn to keep a global economic engine firing.

But that's just crazy talk.

Hope you're all stocked up on beans, rice and spam.

Mar 07 06:48 PM

[MGA_1:]

Sigh... when will this "thing" end? The debt based economy that we all have been living in is basically evaporating and we really won't start to feel there is a "recovery" until manufacturing begins to tick away in America again. I'd say this won't happen until after the last of the Alt-A/Option Arm's clear through the system, so:
2012 + 2-4 years
I'd actually say we can't have a meaningful recovery until the balance of trade deficit becomes negligible.

Mar 07 07:20 PM

[James Shaw:]

I do believe that market bottom is here as if you read the comments here and not even single one is bullish on the market.

market bottom is when the mood is extremely bearish.

My fund is 100% long in stocks as of Friday.

Of course, I have to buy stocks with undervalued good fundamental stocks. Right now there are plenty. Those stock prices were driven down by fear. Many have pe = 1. On average, S&P 500 pe = 20.

Mar 07 08:53 PM

[LilBob:]

I agree with you one hundred percent that the economy isn't properly structured. After NAFTA and various other trade agreements freed up American factory workers from their old-economy positions so they could pursue exciting careers as Wal-Mart and Target store clerks, there really wasn't anything to reinvigorate the wage-pool for the majority of consumers. Unfortunately, in this country we've killed the goose that laid the golden egg. The appeal of selling goods at developed world prices, without having to pay developed world wages led to a bottoming out of available capital. That was followed by massive lending of short-term high interest debt products (credit-cards, auto-title loans, etc.) and eventually contributed to the sub prime crisis.

This economy may be able to stabilize within the second half of this year, but unless we start to see American business pursue a path of substantial value-based business development and market growth-rather than Web 2.0 fueled bullshit we'll only see a temporary improvement in economic figures.


On Mar 06 01:31 PM Yohei wrote:

has to rebuilt from a "financial economy" and from a
> "consumer economy" into an economy that actually makes physical things

Mar 07 09:07 PM

[Sentinel:]

You had better hope to God that peak is just that and not a plateau.

I've been unemployed since May of 2008.

If I am anywhere indicative of the time it is taking laid off people to find work again, then your bottom will be flat and long.....like an L.

Mar 07 11:11 PM

[User 371810:]

"The future used to be plastics. Now it is pills."


You will work longer to pay for those pills to allow you to work longer to pay for those pills. Hmmmmmmmmmmm

Mar 07 11:20 PM

[User 371818:]

I don't see this getting better until at least 2010 first, maybe 2nd quarter. And that seems to be the consensus of all the people that have understanding of history and markets. Now is not the time for rose colored glasses. This is a world wide economic holocaust, most of which we, "The United States" have caused. As with history, which we humans seem to never learn, the next step will be a 25% unemployment rate world wide, followed by a world war, based on energy needs, food needs, and medical needs. The good news is, the War will be short....Thermal nuclear wars usually are.....

Mar 08 12:33 AM

[thatguy57z:]

Yes this is going to be worse then 1929 and is going to last a lot longer.
There's going to be longer soup lines if there any soup or bread, open your eye's its going to be way worse. If you got any money in the bank better pull it and start paying cash for everything you need,or you lose it because the Fed's say it's backed, you cant back something if you got nothing to back it with.


On Mar 06 12:27 PM morph366 wrote:

> A sentence like the following - "We're probably beyond the halfway
> point in this process, although there's still too much uncertainty
> to say for sure." - promises some kind of insight into where we are
> at and then takes it away with the qualification.
> Normally in recession unemployment is a lagging indicator - the bottom
> will be in place long before unemployment peaks. But this may not
> be a normal recession

Mar 08 01:21 AM

[joshuaodonnell:]

I completely disagree. I believe things will get much worse. Its not government you have to worry about. Its not the FDIC or even the housing market and huge foreclosure #'s. Im calling 4500 on the DOW.

IT IS THE 62 TRILLION DOLLAR CREDIT DEFAULT SWAP MARKET THAT WILL BRING US ULTIMATELY TO OUR KNEES. WE ARE SEEING IT WORSE IN EUROPE.

Mar 08 03:29 AM

[MGA_1:]

I'll wager 4000 DOW. Have cash on hand. I'd also look into keeping gold & silver coins & bullion around as a precaution.

The banking system is in terrible straights and I think the FDIC will basically go belly up without federal help which should eventually translate into a fed rescue and inflation - there is no way the fed can sterilize the debt with this one.

Unfortunately, the credit collapse we are seeing is almost unprecedented so it's necessary to throw out all previous expectations. Remember, the fed spent something like 300 billion *on just one company* - Citibank. Citibank is just one of many banks in trouble.

Tough times ahead. We might see an uptick in 2010 due to federal spending but it should be short lived. Really, all this bad debt needs to clean out and we need to learn how to manufacture once again.

At the height of this thing, don't be surprised with unemployment > 15%.

Mar 08 05:08 AM

[Amitabha Mu...:]

For too long a time period America became dependent on the paper economy and it excelled in the areas of banking and financial services and as the years rolled by this areas only became the thurst areas. To make quick money innovative derivaties came into existence and the population ran after it without giving a thought to the hard fact that during all these years actual economy of manufacturing slipped through the hands. It was the stagnation of its automobile industries that helped Toyota and Honda to outsell detroit three and then it was the laid back approach of Boeing that cleared the path of Airbus coming with A380 that is much more ahead of boeing 747.
In the area of superfast train it was long beaten by Japanese and French bullet trains. Even in the areas of nuclear power plants, France and Russia are doing much better.
The most unfortunate aspect of America is that its best boys and girls opted for medicine and law instead of engineering. Now however desperately the country may try at will be lagging in many areas for many years to come.

Mar 08 07:38 AM

[Free2Speak:]

Gloom & Doom...that is all I see here. Folks, it is bad right now. But, there is a "glass half full" scenario that everyone is missing. Just consider the following elements that will likely cause a bullish market once things turn:

- The shorts are at an historic high, meaning they will have to cover when the upturn begins.

- The amount of cash out there is at historical highs; people are just waiting on the sidelines ready to jump back in once they feel the market is moving positive.

- The initial jobless claims dropped for the first time in months--a primary indicator of an end or bottoming of a recession.

In my view, two underlying causes are blocking the upturn. 1) The administration, in its zeal to pass a sweeping social agenda, was willing to sacrifice confidence by badmouthing the economy. 2) The administration has failed to instill confidence that the financial institution problem is going to get better. Fix these two areas and we will see a strong bounce!

Mar 08 10:23 AM

[marketman54:]

The sky is falling and will continue to do so until the housing debacle is corrected.

Additionally, whenever the unemployment numbers begin to turn downward, this still means even more people will not be out spending money!!!

We are a consumer driven economy, all the consumers have disapeared!!

Mar 08 11:07 AM

[Little Pro:]

^Thank you for taking time to respond to my comments.


On Mar 07 10:51 AM paultaut wrote:

> little pro: you asked for 2 bits.
>
> There are secular Bears and cyclical bears. A Secular Bear can last
> for a decade or more with cyclical Bull markets in between. A Secular
> Bear began in 2000, it has a while to run. One cyclical Bull ended
> in 2007, when the next begins is anyones guess.
>
> A 20% gain usually means a New Bull has begun But in the context
> of today's volitility, it could do 20% can occur in weeks.
>
> Today's Barron's Cover suggests that a rally is coming and coming
> soon. My guess would be After the Ides of March.
>

Mar 08 11:33 AM

[Firat Ünlü:]

I am just watching an interview with Fareed Zakaria from 2008, it he states that the American economy loses four million jobes every month, but still produces 4.2 million jobs each month. This is important because that means that there is not enough job creation, the problem isn't really job losses (650k is just 15% of the four million jobs America loses each 'regular' month). The problem lies with job creation. Furthermore, the unemployment rate is BS as we've been so long in this recession that people that lost their job at the beginning are probably not even included in the statistics anymore!
A further drop in unemployment has been offset by governmental agencies taking in more people, but that is unsustainable as the governments lack the tax revenue.

Mar 08 11:54 AM

[jack59:]

A comment, not by me, that is worth reading:

Obama Follows Bush on Spending

The gap between rhetoric and hype in President Barack Obama’s budget is as wide as the Pacific Ocean. Obama has not offered change; he has offered a continuation of George W. Bush’s policies.
Obama is not the anti-Bush. He is Bush on steroids.
Bush’s policies could be summarized in one sentence: Spend like a drunken sailor and don’t pay for it. Obama’s policies can be summarized by the same sentence, except that Obama goes beyond drunk to alcohol poisoning.
If Bush policies were disastrous, as Obama claims, then why is he continuing them?
Sure, Obama’s fans might say government finally is going to restore some fairness by spending on health care and other problems. Fact is, this was Bush’s core belief too, which is why he championed and signed the massive prescription-drug benefit
under Medicare. In the end, Bush offered voters juicy benefits without paying for them.
That’s exactly what Obama is doing too. Only now, the scale of spending is becoming truly shocking. (March 2)

Kevin Hassett

Mar 08 02:43 PM

[jack59:]

I don't believe in looking at history to try to predict the future, and even more so nowadays. This recession is deeply different from any other in the past and, therefore, its behavior is and will be different. First of all is the first really global recession, secondly it's the first one which has wiped out the financial system which is technically bankrupt, and last it involves also countries (BRIC) which where not considered in previous recessions. This one is deeper, meaner and is going to cause a lot of damage. I think we are not even half way through it.
In 2009 we are going to see a lot of bankrupt companies, think of Arcelor with $34 bio debt as a good candidate.
Hang on to your cash, keep debt as close to zero as you can and be patient. It's going to be a rough ride.

Mar 08 03:01 PM

[mrfolly:]

The Treasury Secretary is open to suggestions. Funny stuff:

madoffwatch.org/?p=333

Mar 08 08:01 PM

[silver-bug:]

Bottom, my A$$.. It ain't over till the FAT lady sings.. and the fat lady has yet to gain a few more pounds before she can be called a FAT lady.

There's still too much toxic waste in the system for this financial system to get better.. Instead of the government trying to pump $$ into the system AND trying to plug holes, it should allow the system to flush out the toxic waste.

Mar 08 10:25 PM