Since spring I’ve called for a cyclical recovery in the US and other developed economies, a prospect that would power a substantial rally in global stock markets.
Although I agree with many of the bears’ long-term concerns--for example, excessive household and government debt--the Index of Leading Economic Indicators (LEI) suggests that at the very least a temporary, cyclical improvement is underway. And while any recovery in the US economy will likely be weak, mounting evidence indicates that certain foreign and emerging markets are enjoying a particularly robust recovery. Because S&P 500 companies generate an increasing share of their earnings overseas, this foreign recovery is bolstering corporate profits.
Critics usually cite unemployment statistics when questioning my call for a cyclical economic recovery. I’m often asked how I can call for economic growth when the US unemployment rate has leapfrogged 10 percent, the highest level in decades.
Rather than listen to the endless hyperbole that perpetuates in the media’s discussion of employment statistics, let’s examine the actual data and unemployment trends during prior recessions.
The most widely watched report of US employment conditions is the Bureau of Labor Statistics’ (BLS) monthly Employment Situation report that’s released on the first Friday of each month.
The first step is to define unemployment. The US unemployment rate is defined as the total number of unemployed divided by the labor force. This measure depends both on how one measures the total number of unemployed and how one measures the size of the labor force. The BLS’ survey omits many people that one might consider unemployed.
To qualify as unemployed one has to be looking for work. For example, a “discouraged worker” isn’t working, nor has he or she recently looked for a job. But he or she does indicate that they want a job and have looked for work in the recent past.
Discouraged workers include potential workers that just don’t feel they can find full-time employment. Discouraged workers aren’t considered part of the labor force and, consequently, don’t factor in to unemployment statistic. BLS also excludes workers who can’t find a full-time job and instead take on part-time work. Although these workers are employed, there’s a strong possibility they’re not making as much as they’d earn in full-time employment and, in fact, would rather be in a full-time job.
This graph depicts the total unemployment rate, including discouraged and part-time workers.
As you can see, the unemployment rate stands at 17.5 percent when you include these omitted categories. Although this percentage is shocking, it’s the most useful statistic because the BLS only publishes data going back to 1994--it’s tough to make a meaningful comparison.
Nevertheless, by this measure the unemployment rate is almost twice what it was at the height of the 2001 recession. That being said, the 2001 recession was barely a recession and is widely considered to be one of the mildest in US economic history. This isn’t a particularly useful comparison; it would be more meaningful to compare the current unemployment rate to the recessions that occurred from 1973 to 1974 and 1981 to 1982.
One valid conclusion we can extrapolate from data is that this measure of unemployment topped out in late 2003, roughly two full years after the 2001 recession ended. In other words, the full unemployment rate appears to be a lagging indicator.
Along these lines, the conventional measure of the unemployment rate tends to lag economic recoveries. The last spike in unemployment came after the 2001 recession, which ended in November 2001; in that instance the unemployment rate didn’t top out until June 2003. This pattern held true for the early ‘90s recession, which ended in March 1991; in that case the unemployment rate didn’t top out until June 1992.
This lag is hardly a new phenomenon. In the vicious economic downturn that occurred from July 1973 to March 1975, the US unemployment rate peaked at 9 percent in May 1975.
To make a long story short, the recent jump in the unemployment rate--no matter how you look at it--isn’t inconsistent with economic recovery. I wouldn’t be surprised if unemployment trended higher well into 2010.
The rate of change in the unemployment rate is another useful metric.
To create this chart, I compared four different recessions: 1973 to 1974, 1990 to 1991, 1982 to 1983, and the current contraction. I examined the official US unemployment rate six months before the beginning of each recession as well as several months after the unemployment rate topped out. Because the recession of the early 1980s was a double-dip, I counted that cycle as a single downturn.
There’s no way to sugarcoat this chart. One would expect the current downturn to be worse than the comparatively mild recession that occurred between 1990 and 1991, but the so-called Great Recession is worse than the downturns that occurred in the 1970s and 1980s. In the first half of the graph, unemployment appears to behave normally, but the situation deteriorated rapidly at the end of 2008--the height of the credit crunch.
Here’s yet another way to analyze US unemployment.
This chart depicts the percent change in monthly initial jobless claims from six months before each recession. Weekly jobless claims data is released every Thursday. This data comes from individual states that record the number of workers filing for first-time jobless benefits. Unlike the unemployment rate, initial jobless claims tend to be a leading indicator of US economic activity. The last spike in initial claims topped out in September 2001, before the end of the 2001 recession. Back in 1991 claims data topped out about a month prior to the recession’s end.
The graph depicts only the three worst recessions in the post-war era: 1973 to 1974, 1981 to 1982 and 2007 to 2008. As you can see, initial jobless claims appear to have spiked at a faster face in this cycle than in the early 1980s but at a slower pace than in the mid-1970s.
The current pattern appears to be playing out much like what occurred in 1973 to 1974.
Debates over unemployment tend to be filled with hyperbole. The reality is that the unemployment rate tends to rise months after recessions end; it’s not valid to claim that falling unemployment is a prerequisite for recovery.
Finally, my comparison of the recent contraction to prior recessions shows it to be just as bad but arguably no worse 1973 to 1974 and 1982 to 1983. The bottom line: These statistics don’t preclude a cyclical upturn but do offer further reason to expect tepid consumer spending and a cyclical economic environment in coming years.