Underemployment vs. Unemployment Rates

Includes: DIA, SPY
by: Robert Moreno

The 2001 recession began in March of that year and ended eight months later in November. The unemployment rate, however, continued to climb through 2002, finally peaking at 6.3% in September of 2003, some 22 months after the official end of the recession.

In four of the last five recessions the peak in unemployment claims has led or lagged the trough period of the recession by about one month but the unemployment rate continued to rise, as we saw in the 2001 recovery, and as we are seeing with current data. (This does not make Thursday’s claims numbers anything on which to hang a rally hat.)

Employment growth lags in any economic recovery but a comparison of the 2001 and 2009 recessions may provide a clue as to how much the current unemployment rate will trail in this recovery period.

There is a particular piece of underlying data in the jobs report that we can use in the comparison. The “underemployment” or U6 rate measures the unemployed, those unemployed looking for work and those unemployed who have stopped looking for work but looked for work sometime in the recent past. It is considered by some to be a better gauge of true unemployment. What is concerning about job growth as we exit our current recession is the present level of “underemployment” as compared to the 2001 recession figure. Last month our “underemployment” rate was 17%. The highest it reached in the previous downturn was 10.4%. To put the figures in context, the 2001 recession was the third mildest recession in the post-war period but the decline in employment that continued through late 2003 was the largest in the post-war period.

With the current “underemployment” rate 38.8% higher than it was at its peak in the 2001 recession, the unemployment rate going forward could trail, significantly, extending well into 2011 and we could, unfortunately, set a new post-war record.

The 2001 recession had much to do with the effects of the dot.com bubble, when businesses built upon “vapor” vanished into thin air. This current recovery has to deal with the consequences of a worldwide financial crisis and the collapse of major financial institutions. The “underemployment” figure clearly indicates that the prospects for job growth in the near future are extremely weak, what remains to be seen, is if the consequences that follow are great enough pull the economy back into recession.