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Recession History
The widely-watched unemployment rate, released the first Friday of each month, turns out to be a lagging indicator of economic recovery and stock market profits. On the surface, that seems illogical. How can companies (and their investors) profit while more Americans are saving, scrimping and job-hunting rather than trolling shopping malls, traveling, fueling a consumer-based recovery? But on second look, it makes sense that earnings can rise handsomely when staff counts are at their leanest and most efficient. As soon as bad job news starts looking a little less bad (as happened in March), stocks can begin their long-awaited rebirth.When I look at the last six official recessions, this pattern comes clear. A generation ago, we had four deep recessions in the stagflation era (1970 to 1982), in which the peak jobless rate lagged the stock market’s bottom by 4-7 months. Then, we experienced two softer recessions in the goldilocks era, with a longer time lag, but in each case the stock market recovery began several months before the unemployment rate peaked.
| Market bottom | Recession Ends* | Jobless peak | (Peak rate) | Months (Lag) |
|---|---|---|---|---|
| May 26, 1970 | November, 1970 | Dec, 1970 | (6.1%) | 7 |
| October 3, 1974 | March, 1975 | May, 1975 | (9.0%) | 7 |
| March 27, 1980 | July, 1980 | July, 1980 | (7.8%) | 4 |
| August 12, 1982 | November, 1982 | Dec., 1982 | (10.8%) | 4 |
| October 11, 1990 | March, 1991 | June, 1992 | (7.8%) | 20 |
| October 9, 2002 | November, 2001 | June, 2003 | (6.3%) | 9 |
| March 9, 2009 | Mid-2009 ** | Late 2009 ** | (?? 10%) ** |
*According to the National Bureau of Economic Research (NBER).
** My simple estimate, based on speculation and historic patterns,
nothing more.
The end of the recession usually comes before the peak in jobless rates, since companies seldom re-hire until the chances of recovery seem fairly clear from other data. This current recession officially began in December, 2007. No post-World War II recession has lasted longer than 16 months until this one, so the 2008-9 market crash and recession already represent the roughest recession since 1981-82 and the worst stock market crash since 1929-32. Today’s 9.4% unemployment rate is already the worst since 1983.
Many economists feel that the pace of new jobless filings is decreasing substantially: May payrolls fell by 345,000, which was much better than the consensus expectation of 520,000 jobs lost. This was the first time in six months that monthly job losses were less than half a million. But since the labor force grew substantially in May, the jobless rate soared 0.5% to 9.4%, tying the record for the largest monthly leap since 1975. This sounds strange – new jobless filings falling while the jobless rate soars – but the jobless rate is based on how many people are LOOKING for work and can’t find it, so if more Americans come out of their jobless funk and start shopping for jobs, that’s a good sign – even though it sends the jobless rate up. These people are typically more confident about finding a job.
At this point, it’s worth a minute to compare the two major job surveys, since their data often conflict:
(1) Payrolls: The Current Employment Statistics (or “Payroll Survey”) contacts 160,000 businesses at 400,000 locations, reporting trends of hiring and firing in non-farm, non-supervisory jobs, so it only measures that part of the economy that is most sensitive to corporate layoffs and hiring.
(2) Households: The Current Population Survey (“Household Survey”) contacts about 60,000 U.S. households, asking if the adults there have a job or are looking for work. This survey is best for measuring those self-employed and part-time workers who operate outside the scope of company payrolls. This survey is also a practical reflection of real-world situations, since it contains six levels of unemployment, ranging from hard-core (jobless and looking for work 15 weeks or longer) to semi-underemployed cases (part-time workers looking for full-time work). The official unemployment rate is currently 9.4%, but when you include part timers looking for full time work it shoots up to 16.4%. This statistic started back in 1992 so it was not used during the 1982-1983 recession.
According to a May study by the Federal Reserve Bank of Cleveland, the number of involuntary part-timers has increased by 4.9 million in the past year, reaching 9.1 million in May. The dismal May household survey also said that unemployment rose by 787,000 to 14.5 million in May, while 350,000 people joined the workforce, since they felt better about the prospects for finding full-time work. As bad as the current situation seems – especially to the 16.4% who are unemployed or under-utilized – the situation was slightly worse in 1982 and far worse in 1932, when the official jobless rate was 25%, but the estimates were that at least 50% of non-farm workers were in the “part-time” category or worse. In other words, half of non-farm Americans had only part-time work or none at all. In the 1930s, rural farms were a much greater proportion of the economy, and farmers were counted as employed, even if their farm was losing money. As a result, the official national 25% unemployment rate in 1932-33 ballooned to a record 37% of non-farm workers – that’s comparable to today’s non-farm payroll report – and the rate was far worse in urban manufacturing regions. For instance, the jobless rate reached 60% in Cleveland and 80% in Toledo.
President Hoover’s first response to the 1929 stock market crash was to convene a series of conferences with industrial leaders in which he exacted from them solemn promises not to cut wages; even to increase them if possible – promises kept until 1932. The prevailing economic theories of the day taught that high wages create prosperity, so Hoover enforced stable-pay pledges. Sadly, that left employers with no choice other than to fire workers. That's how politicians think because they are motivated by votes, not reality. If you ever get a chance to sit down and read a good book about the depression years, I recommend "The Forgotten Man" by Amity Shlaes.
Later, Hoover and FDR cut their own pay along with the pay of Congress and other federal employees by 15%, but they should have allowed other Americans to work for 15% less, too. In a 20% deflationary skid, earning 15% less makes you a net winner. As it turned out, wages rose while jobs disappeared. The policy implications for today’s legislators seem clear: Don’t overly meddle in trying to provide short-term job security at the expense of killing the inevitable recovery, which is now only a few months away. Additionally, all politicians in Washington DC and at state and local governments should take pay cuts of up to 25% until this recession passes. Feel free to email your Congressperson and Senator with that realistic request. Without a vibrant private sector, the public sector (i.e. government) will not be funded. Herein ends the history lesson of the day.