Unemployment Rates, Recession Periods and Stock Market Prices

The Labor Department reported on Friday that 84,000 jobs were lost in August 2008 indicating a 6.1% unemployment rate. This current unemployment rate is the highest since September 2003.

The purpose of this article is to understand the relationship between unemployment rates and recession periods and finally their link to stock market prices.

The first chart depicts the seasonally adjusted historical unemployment rates starting from 1948 till 2008. Over the last sixty years, unemployment rates varied from a low of 2.5% to a high of 10.8%. The unemployment rate by itself is not a good indicator, however by combing recession periods with the unemployment rate we can find certain interesting relationships. According to the National Bureau of Economic Research, we had 10 recession periods between 1948 and 2001, with an average recession period being approximately 12 months. These historical recession periods are plotted with orange shade on the unemployment rate graph.  

As you can see from the graph, throughout the recession periods, unemployment rates rose sharply. During the entire ten recession periods, the average increase in unemployment rate was approximately 2.6%.

click to enlarge images

Data Source: Bureau of Labor Statistics

Out of the ten recession periods, the last four registered an average of 2% increase in unemployment rates. Consequently, stock market lows don’t happen without first registering the 2% increase in unemployment rates. During the last recession, starting from the beginning of 2001, a 2% increase in unemployment rate happened approximately around December 2002 and this period also coincided with the lows of S&P 500.

If you want to analyze current market conditions, we still haven’t seen the 2% increase in unemployment rate. Starting from the recent consolidation area in unemployment rate which is around 4.7%, we are still short of approximately 0.5% for a full 2% increase.

So the markets have not seen the full bottom yet and the coming unemployment reports will be crucial for the clues regarding future market direction. You should be fully invested whenever you see a 2% increase in unemployment rates because these periods indicate general gloominess about the economy and provide excellent opportunities for further growth in the financial markets.

Readers are also reminded that this is not a definitive answer to market bottoms but an approximate guideline to consider in decision making.

Comments

[EF]

To point out one of the many points of sloppy analysis contained in this article, the payroll employment survey and the household unemployment survey are conducted by two different agencies; employment data comes from the Bureau of Labor Statistics (BLS), while the unemployment data comes from the Census.

Notice on all other news reports, the employment figures were just released for AUGUST by the BLS. Unemployment, on the other hand was just released for JUNE. Attempting to correlate the two is sloppy and misleading.

Because of the differing methodologies within each survey, the two data series are not directly correlated in the sense that some think.

2008 Sep 07 01:04 PM

[MarvinMBA]

In some ways this is way too complicated. Things are tough and we all know it. When the ship starts going down each of the passengers should have on a life jacket...some will and some will not...survival going forward is the name of the game. Get out of the market and save yourself is my take on this write.

2008 Sep 07 01:21 PM

[brotherj5]

User 118015,
I disagree with your conclusion unless you are a short term "investor" (speculator is more app imo). If I can grossly generalize, long term investors should buy when the market is going down and sell (way into the future) when the market is going up. Fortunately (or unfortunately depending on your perspective) most people who think of themselves as investors do what you suggest, which is to panic sell when the market is falling and buy once the market has already approached a peak, thereby absolutely minimizing their return (or in many cases realizing a negative return). But investing implies risk, and there is no perfect strategy as no one can truly know what is going to happen tomorrow, next month, next year or next decade.

2008 Sep 07 01:35 PM

[golfgator65]

Interesting charts. I noticed the last "bottom" in the S&P was April 2003. The unemployment did not peak until July 2003 (3 months later). This kind of make since as the market always seems to tell us when we are pulling out of a recession or down cycle or what ever you want to call this. Personally I think the negative vibe is pretty pervasive, which tells me it is time to start slowly wading back in to the market. There are a lot of high quality companies that continue to grow that have been beaten down by the rest of the market.

2008 Sep 07 02:07 PM

[Thingsareevenworse]

What is not reported is that the U6, which counts the discouraged workers, marginally employed, under employed, people holding down 2-3 part-time jobs or temp jobs is at about 10.7% for August according to BLS. This means about 1 in 9 workers, and their families, are hurting. This is a big story but no one seems to report on it.

2008 Sep 07 02:43 PM

[User 143167]

It is only a question now about how deep will this recession go. Mild recession will have unemployment peaking out at 6%, but you can't bet on this one will be shallow. It might end up with a very ugly one with unemployment rate reaching double digits thanks to the global economic meltdown.

2008 Sep 08 02:11 AM

[Will Rahal]

I posted on the relationship between Employment, Business Investment and the S&P-500.
We are heading lower.

2008 Sep 08 10:02 AM

[Gary Meade]

You sound like an expert! One question, formed in haste, are the economies now and then equal? In other words...would they both suffer the same dislocations with a 2% rate?

2008 Sep 08 10:14 PM