Chart of the Day: This Time It's Different

This time it's different. How often has this been said at the speaker's peril and future embarrassment. Well, sometimes it's true.

Look at how the unemployment trend compares to the other recessions of the past 55 years in the following chart:

The chart is compliments of Chart of the Day.

There is another graphic on a post by Barry Ritholtz (The Big Picture) which is not nearly as pretty, but shows that the current unemployment curve (to date) is not that different from the 1957-58 and 1973-74 recessions.

So this time is different from the averages, but so were two preceding recessions since World War II. It remains to be seen if the current recession will remain comparable to the two other recessions over the coming months. There are many predicting that the current recession curve will continue downward for several more months, at least, and that would make this time different.

Steve Hansen has pointed out that changes in measurement and analysis methodology may have changed the reported unemployment rate (less unemployment) today from what it would have been with older methods.

He also points out (correctly) that initial unemployment claims is a better coincident indicator of what is going on in the labor market and the economy. Read his entire comment here.

Comments

[TradingHelp...:]

Excellent John. Unemployment recovers more slowly after a financial crisis recession. Using recent IMF research:

Extract: "Including contractions prompted by a financial crisis the average recession lasted 3.64 quarters. The average recovery period was 3.22 quarters and the average expansionary period lasted 21.75 quarters. Analysing only the contractions caused by systematic financial failure, the average length of recessions increased to 5.67 quarters. The recovery period also lengthened to 5.64 quarters on average."

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Jul 05 06:41 AM

[CautiousInv...:]

Putting aside that BLS could be spinning the numbers through business birth/death adjustments, this has been a very destructive recession as John suggests.

I think most, including the administration, believe when the skies clear there will be a mean reversion trend and unemployment will rapidly return to 5.5%.......the upper end of unemployment consistent with full employment conditions.

Nothing could be further from the truth. Studies show that in an economic contraction cycle it takes X months to go from 5.5% unemployment to peak unemployment and 2X months to go from peak back to 5.5%.

For sake of conversation let's say unemployment was 5.5% in May of 2008 and unemployment peaks in May of 2010......two years. To the extent history is a guide and believing many who think it will take longer this time, it could take four years beyond 2010 before we see an unemployment rate as low as 5.5%...........which would be 2014.

And this could prove optimistic as it takes longer for economies to recover from economic contractions brought on by a financial crises than typical inventory corrections.

Jul 05 08:40 AM

[perceptions...:]

It may well be a very interesting to see the comparison against the data from the Great Depression!

I would think both would show deep & continuous downward trends and the final duration of both events may also show similarities.

As it is, and for a number of reasons, this event is likely to rank up there with or exceed some of the outcomes of the Great Depression, in a number of areas.

That said, the base causes are also different in a number of areas, whilst some of the old favourites, such as Greed, are here again.

Jul 05 09:22 AM

[basehitz:]

Perceptions:
Great Depression states were Posted by Prieur du Plessis on 5/3/09 in his blog "Words from the (investment) wise for the week that was (April 27 – May 3, 2009)". Data as follows:
Real GDP
1930 fell 8.6%
1031 fell 6.4%
1932 fell 13%
1933 fell 1.3%

Unemployment rate peaked at 25.6% in 1933

CPI:
1930 fell 2.7%
1931 fell 8.9%
1932 fell 10.3%
1933 fell 5.2%
1934 rose 3.5%

John, thanks for post.
Cautious, ditto on informative comments.

Jul 05 10:17 AM

[Old Trader:]

The July 3 edition of the FT had a short but interesting piece about unemployment in the temp sector. As the economy starts to soften, firms start cutting temp workers before they cut core staff. Conversely, in the earliest stages of a possible turnaround, temp hiring goes up, since companies aren't certain of the sustainability of the rebound, and refrain from hiring permanent workers. Looked at in this light, unemployment figures in this sector can be considered leading indicators, as opposed to broader numbers, which are typically considered lagging indicators.

The American Staffing Association did a study covering 36 years of data and estimates that the general labor market starts turning 3 months after the temp sector rebounds. Unfortunately for us, the numbers on temp employment mirror the overall picture; "less bad" declines in May, followed by a sharp spike for the worse the following month.

Jul 05 10:25 AM

[Leftfield:]

Without a doubt our descendants will notice the difference between this and all other, far less financially damaging debt binges in any other recession/depression.

Jul 05 03:15 PM

[Fighting Yoda:]

Diffusion indicator, part time workers, length of work week are important indicators of employment recovery – all these are very poor levels. Work week hit an all time low of 33.0 hours, diffusion indicator even though above its lows is still at 28.6 which means that nearly three-quarters of the corporate sector is still in the process of shedding jobs, wages are stagnant at $18.53.

All in all absolutely no green shoots of any kind, someone did pull a fast one with the green shoot PR job. Earliest job recovery is unlikely before 2011, so lot of tough sledding ahead.

Jul 05 05:45 PM

[CLH:]

As most of the comments have noticed, a debt crisis has not happened since the 1930s so comparisons of the current crisis with all other recessions show that they are different.

Jul 05 07:13 PM

[Sunil Rajak:]

Nice comment, however, I believe that global economic contours have changed quite a lot from the periods of 1957-58 and 1973-74 when the US economy experienced recession.
Currently there is much higher level of global economic integration which was illustrated in the fast and furious pace of spreading US financial crisis to the other parts of the globe. I believe similar fast pace will be experienced when other major economies like China and India keeps the growth pace.
Secondly, most of major US corporations are much more geographically diversified than ever before. So, a substantial part of economic growth driver will be coming from non-US economies. If you look at a leading consumer company like PG, its non-US revenue has been increasing constantly over the period FY03 to FY07 from ~50% to ~58%. Data source: Gridstone Research. Similar trend could be identified for other major US coroporations.
Thirdly, major leaders and economists of major economies are on much more on the same page when it comes to reviving growth than in the past.

Given all this I believe that recovery in the US economy and elsewhere would be faster than what has been experienced in the past.
Thanks,
Sunil Rajak
Gridstone Research.



On Jul 05 08:40 AM CautiousInvestor wrote:

> Putting aside that BLS could be spinning the numbers through business
> birth/death adjustments, this has been a very destructive recession
> as John suggests.
>
> I think most, including the administration, believe when the skies
> clear there will be a mean reversion trend and unemployment will
> rapidly return to 5.5%.......the upper end of unemployment consistent
> with full employment conditions.
>
> Nothing could be further from the truth. Studies show that in an
> economic contraction cycle it takes X months to go from 5.5% unemployment
> to peak unemployment and 2X months to go from peak back to 5.5%.
>
>
> For sake of conversation let's say unemployment was 5.5% in May of
> 2008 and unemployment peaks in May of 2010......two years. To the
> extent history is a guide and believing many who think it will take
> longer this time, it could take four years beyond 2010 before we
> see an unemployment rate as low as 5.5%...........which would be
> 2014.
>
> And this could prove optimistic as it takes longer for economies
> to recover from economic contractions brought on by a financial crises
> than typical inventory corrections.
>
>

Jul 06 12:17 AM