April 09, 2009
Initial unemployment claims and the end of recessions
Fed Chair Ben Bernanke a few weeks ago said he saw some green shoots of favorable developments in financial markets. Does today's Labor Department report that the seasonally adjusted number of initial claims for unemployment insurance fell by 20,000 workers in the most recent week constitute another?
This story in the Wall Street Journal a few weeks ago also caught my attention:
"There's growing evidence supporting the optimists' view, and I am surprised at that," said Robert J. Gordon, an economist at Northwestern University and a member of the National Bureau of Economic Research committee that is the official arbiter of when recessions begin and end. "I was sort of in the pessimists' camp until I started looking at things."
He points to one indicator in particular with a remarkable track record: the number of Americans filing new claims for unemployment benefits. In past recessions, it has hit its peak about four weeks before the economy hit a trough and began to grow again. As of right now, the four-week average of new claims hit its peak of 650,000 in the week ended March 14. Based on the model, "if there's no further rise, we're looking at a trough coming in April or May," he said, which is far earlier than most forecasts currently anticipate.
I was curious to take a look at the pattern that Gordon identified. The graph below plots 4-week averages of the initial unemployment claims going back to 1967, with vertical lines drawn at the first week of the month in which the NBER eventually declared that a recovery from the recession began. Gordon's relation is indeed pretty striking-- in each of the last six recessions, the recovery began within 8 weeks of the peak in new unemployment claims.
The graphs below display the 12 weeks preceding and following the business cycle trough for each of those six recessions in more detail. The blue line shows the 4-week average and the black line the raw weekly data themselves. The last of the 7 panels displays the most recent 13 weeks of data, in which one can see the flattening of the blue curve from which Gordon found some grounds for optimism two weeks ago. The number released last Thursday pushed the average back up to a new 2009 peak. But today's datum brings the 4-week average down, ever so slightly, from the week before, and further reinforces Gordon's tentative impression of a possible flattening. [Bigger version of the picture is available here]
The series plotted above for all previous recessions are the currently known revised numbers. It would be interesting to see how easy the pattern is to recognize in initial data of the kind that we're actually trying to use in the last panel.
Perhaps there's nothing of significance here, as it's all too easy to read too much into the temporary ups and downs that are part of any broader trend. But I agree with Gordon that these numbers bear watching. If subsequent data confirm that the 4-week average of initial claims did indeed reach its peak in the number reported April 2, and if Gordon's pattern holds up, the recovery that many of us had assumed would be quarters or perhaps even years away may instead have started by June.
Posted by James Hamilton at April 9, 2009 09:09 PMdigg this | reddit
Perhaps peaking unemployment claims drive the date that the NBER eventually declares - ie, these times coincide because they are really the same event.
Posted by: Mogden at April 9, 2009 09:38 PM
I believe that the end of the recession could be near, but there will still likely be more job losses and below trend growth ahead. When the recession is over, it won't feel like it's over.
Posted by: Steve at April 9, 2009 10:26 PM
Sure looks to me like in the 1981-3 recession there were two intermediate "peaks" on the way up (in the topmost chart), well before the 1982 year-end period covered by the bottom-most chart. In terms of ratio to total employment, those peaks were probably near the current one in percentage terms.
Posted by: jm at April 9, 2009 10:52 PM
There must be huge pent up demand out there at the moment, just waiting for things to get better or at least stabilize. When this tsunami of consumer buying occurs the economy will recover more quickly than you can imagine.
Posted by: Snotty at April 10, 2009 04:17 AM
Benjamin Anderson wrote in his book Economics and the Public Welfare, "...any country can have heavy unemployment if it is willing and able to pay for it."
When we discuss unemployment it is important to understand what unemployment is to properly analyze it. One thing it is not is a trend on a graph.
We must first understand that unemployment is voluntary. Unemployment exists because it is funded or created, not because it is inherent in the economy. You can go to any metro area and find that for the past year businesses have needed employees. Every metro newspaper still has help wanted ads. The first response is, “But we don’t want those jobs.” Doesn’t that admit that unemployment is voluntary? If your family was really hungry you would take any job you could get.
Unemployment comes from various sources.
It can come when an individual has sufficient savings to allow idle waiting to find a job better than current jobs, but that is voluntary.
It can come from individuals who are supported by others, relatives or friends, but that is voluntary.
It can come from individuals receiving unemployment insurance payments sufficient to let them choose to live at a poverty level but not have to work.
But it can also come from government policy that prevents employment due to conditions such as minimum wages, legislated work rules, and other, but that is voluntary because it is created by the volition of the government.
And as an adjunct to this, union or others can intimidate workers into not working creating unemployment, but again that is voluntary compliance to the pressure of the group.
The bottom line is that individuals are unemployed because they or their government choose to pay for the unemployment either directly or through lost productivity. When disincentives to work are reduced unemployment decreases. One of the best examples of this was when Bill Clinton signed welfare reform. The unemployment rate dropped significantly and the economy surged for two related reasons: 1) individuals became productive workers adding to society and 2) these individuals were no longer a drain on society.
It is also important to understand that the government cannot create jobs. Government expenses are a cost of doing business. If government takes resources from the productive society to employ an individual it reduces employment in the public sector by the cost of the employee plus any overhead incurred.
All that said, I forecast double digit unemployment by the fourth quarter 2009. This was based on the rhetoric from the Obama administration concerning expansion of unemployment payments, the creation of government “jobs” programs, and attacks on business profits leading to labor reductions . The destructive rhetoric has slowed somewhat, probably because the polls began to show that Obama and the Democrats were slipping. If the Obama administration backs away from its Fascist tendencies and begins to let the market work we could see declining unemployment, but I just don’t believe Obama and his people can leave well enough alone. I still believe they will create double digit unemployment by the fall. Hopefully I am wrong.
Posted by: DickF at April 10, 2009 05:56 AM
I guess the question is: Have we reached the peak in the number of new unemployment claims? I'm not yet convinced.
Also, as Steve suggests, whether or not we've reached that peak, I expect literally millions more to become unemployed in the next year. And the economy will not be springing back; more like crawling along at some 70-75% of potential GDP for several years.
Posted by: Terry at April 10, 2009 06:03 AM
I am not sure what "end of the recession" means. In this it must mean no longer getting worse, which it can'[t do forever.
Retirement savings of the boomers and home values are decimated. I am not sure what pent up demand you are talking about. Autos? They still won't qualify for a loan. Housing? They still won't qualify for a loan. TVs? Without MEW there is no pent up demand.
There were no jobs after the 2000 recession and it sure seems to me there will not be many jobs after this.
In the trade figures yesterday it showed imports being decimated. That means the shock is being translated overseas to reduced demand and so our exports will not pick up.
Posted by: me at April 10, 2009 06:30 AM
I think all this data has to be adjusted to reflect that we have moved from a manufacturing economy in which employment is very tightly linked to the inventory cycle to a service economy in which the inventory effect is not meaningful. Recessions in the past have been linked to the inventory cycle so it is not surprising to see a co-relation between unemployment claims and the bottom of the recession.
It would be an interesting chart to compare not only initial claims but continuing claims. My guess those were closely tied in the past but I would expect to see that diverge in this cycle.
Posted by: Anonymous at April 10, 2009 07:17 AM
Also I think the analysis misses the key message. It is not the peak that matters but rather the speed of the drop following the peak.
Further to my last post the data does show that the decline in continuing claims matched initial claims during in the 70's and 80's , it flattened in the 91 recession , was longer still during the 2001 and in fact hit a new high even though initial claims didn't. So if in fact we may be in for a replay of 2001 without the boost from reckless lending and a real estate bubble.
Posted by: sanjay at April 10, 2009 07:26 AM
Sure, there's pent-up demand -- but have you looked at the household balance sheet lately? The consumer is going to be hobbled until he pays down some debt, and for that you need more than a trough.
Posted by: wcw at April 10, 2009 07:54 AM
In most cases un-employment is the last thing to happen in a recession before a recovery. In most cases the Whitehouse and Congress create an economic policy that will motivate Investors, Biz. large and small to grow.
OK, I am not an economist but an investor. These are the question I have.
What has been fixed? Have Corp. Taxes, Cap Gains, Mark to Market been fixed? Did Obama Folks Nix Crap & Trade when my back was turned?
Grandmas retirement along with most Investments have been hit hard.
JFK,Reagan,Bush,Clinton (Newt) and Bush all have Blue Prints to get out of recession. Are the Obama Folks using any of them?
So let us just say it is a new day and the economy is going to grow at a rate of 2.5% a year starting today.
We are going to spend 10 Trillion Dollars and build no new Refineries, Nuke Energy, or drill for the vast oceans of oil we have in the USA.
How will we find the energy to drive a growing economy?
How will we fight off $300per Barrel Oil with inflation and increasing demand for a growing economy?
Under the current policy. Even if we were to come out of recession. Economic Growth along with the fact we have the same problems in the energy sector as when we went into recession in the first place, leads me to think we would fall right back into another recession after a recovery.
Remember this fact. Most people were making their Home payments up until the loans adjusted and then some were blown out. The Big Hit was when energy prices were inflated (both electric and fuel) that the Sub-prime mess really came to light.
People went for paying $180. eletric bill to $400. and a $400. gas card went to $800 or $900. That was when it all came crashing down.
Sorry to pop this bubble but there are still many questions to be asked.
Posted by: Dave Johnson at April 10, 2009 08:08 AM
Another good conicident indicator is the ISM survey. The ISM new orders index, as well as the overall index, tend to bottom with the economy and the stock market.
I wonder too if the views here that unemployment will persist long past the trough are biased by the last recession when that was true. With such a rapid, deep downturn, I would think a more rapid upturn may be in the offing (didn't Menzie do a post about that?).
Posted by: Joe Calhoun at April 10, 2009 11:25 AM
Good graphs JDH,
What is unique in the current situation is the startling drop in labor force participation rates (after steadily increasing since the 1960's) and length of time before people find new jobs. The recession is 15 months old with absolutely no net job creation.
In my opinion, the recession has just started.
Posted by: MikeR at April 10, 2009 12:10 PM
Sorry, but I fail to see how this downturn is, in any way, comparable to the previous five.
Even if it is comparable, it would seem to me that there are better series at which to look.
Posted by: mp at April 10, 2009 12:59 PM
Household debt to GDP: until it gets slashed, markedly, any 'recovery' will be shallow and short-lived.
We are replaying the Great Depression of '29-'33, in terms of unemployment growth, industrial production fall, etc. During the G.D., absolute household debt fell 36%. Until that happens in this depression, any 'recovery' is a chimera.
Posted by: jg at April 10, 2009 02:26 PM
Claims data can bounce around quite a bit, even using a 4-week moving average. Seasonal adjustment of weekly is also tricky. As a result, I think it as a bit too tentative to call good news yet. I am much more impressed by the rise in the stock market.
Posted by: GWG at April 10, 2009 02:26 PM
Just to recap, I have had the same predictions since December :
NBER Recession ends in Q309
Jobs bottom at 131M (so still 2M more to be lost)
Jobless recovery well into 2010
UE Rate cross 10% briefly
Posted by: GK at April 10, 2009 03:30 PM
Remember that the first graph is not population adjusted, so while it may appear that we are as high as 1983, we actually are not. The US population has increased 30% since then.
Now, that being said, that was a time when the youngest baby boomers were entering the workforce. Now is a time where the oldest Baby Boomer are starting to leave the workforce (a process that will continue gradually for the next 30 years, unless life expectancy rises sharply).
Posted by: GK at April 10, 2009 03:32 PM
A few questions.
1st. What needs to change for jobs to increase in mid 2010? I see no effort to change anything for the better in order to motivate me to invest inside of the USA.
2nd.How can old Folks retire when their 401K has been turned into a 104K.
3rd. We are mandating though our Government that our Blue Collar workers compete with in there own Country with 3rd world labor. Is this meager effort being done to hold down inflation? Better look at energy cost first.
All Amnesty will do, is make for a very hard sell to increase future RE values.
In the end this is how I see it.
The sooner Obama Socialism fails the quicker America can recover.
Posted by: Dave Johnson at April 10, 2009 09:02 PM
I wouldn't put too much faith comparing this recession to prior post WWII recessions. This already is the longest and those recessions were inventory not credit/debt recessions. There are likely to be better indicators such as improving credit spreads than initial claims. It takes longer to work the debt problem off than inventories. Demand will be weaker in the recovery this time around.
Posted by: Brian at April 13, 2009 01:03 PM
As a number of posters have pointed out, the household balance sheets will be in terrible shape for some time. I find it a bit aggravating that people seem to ignore this very basic issue and expect correlations for the post-war recessions to be of much use for predicting the path of the present malaise.
Posted by: don at April 13, 2009 01:08 PM
The way the data is presented in the bottom chart, it is simply telling us that when we know when the peak in claims and the trough are known in hindsight, this relationship can be discerned.
Bu in the top chart, there are multiple intermediate peaks, particularly in the most severe case, 1982.
What would the equivalent charts for those intermediate peaks look like? Isn't that the obvious question here?
Posted by: Bob_in_MA at April 13, 2009 03:11 PM
Bob_in_MA: I don't claim that the peak has arrived. I simply point out that (1) if we are past the peak, and if the historical pattern holds up, then the end of the recession would be expected within weeks, and (2) the 4-week average has been flattening recently and is ever-so-slightly down with the latest number.
Posted by: JDH at April 13, 2009 03:46 PM
If Anonymous at 7:17AM is right, we may just be seeing the temporary bounce of inventory adjustments that PK described. The household balance sheets will still be terrible, though, and the respite will be short-lived.
Posted by: don at April 13, 2009 05:35 PM
I am sorry but the recovery stories are just a lot of wishful thinking. While it is possible for the Fed to offset the inevitable readjustment in the economy by meddling with the money supply and bailing out failed banks it cannot do so for very long without impacting the purchasing power of the currency.
Can anyone imagine what happens if economic activity picks up at a time when investment in drilling for gas and oil has stopped. With existing fields depleting at around 6.5% per year the world needs an economic slowdown to keep prices low. As soon as demand goes up we could be looking at an easy double and that is very likely to pull the economy down yet again.
And what happens if the current low solar activity translates into the expected lower temperatures and lower crop yields? As more and more food production has been wastefully diverted into energy production we are vulnerable to food price spikes that could set off a massive bout of price inflation.
From what I can see the best scenario would involve a flat economy and a world that gets lucky and warms up a bit as the AGW fanatics are warning. If that happens we can make slow adjustments without risking that the fiat currencies head towards their intrinsic value as toilet paper. But if we get a sharp contraction or a recovery we could be in for some horrible times that will destroy our standard of living.
Posted by: Vangel at April 16, 2009 07:39 PM
Simple and true.
Posted by: Ivars at April 17, 2009 04:22 AM