The Peak In U.S. Unemployment

May 11, 2009

The jobless rate is considered a lagging economic indicator, meaning it should continue to crest in the early stages of an economic recovery as employees work longer hours before firms begin to rebuild head counts.  The peak unemployment level was a critical assumption of the stress tests performed on the 19 key U.S. banks.  An article in today’s New York Times by Eric Dash and Andrew martin writes about an historical correlation between credit card debt write-offs and the jobless rate.  One of the strongest complaints that the stress tests were not rigorous enough concerns the assumption of a 10.3% peak jobless rate.  Such has already climbed to 8.9% from 4.4% in March 2007 and 4.7% in November 2007 when the previous economic expansion ended. The Great Recession hasn’t even ended, and it would seem an appropriate label only if the downturn included with the weakest postwar labor market.  Up to now, the highest unemployment rate since the Great Depression was 10.8% in late-1082, so many analysts understandably are using 10-something percent as a baseline forecast for peak unemployment, rather than a worst-case scenario.  A much higher 15.8% level of underemployment in April, which captures people working part-time involuntarily or who became too frustrated to job-search, already is significantly worse than the comparable peak associated with the 1981-2 recession, and that explains why the rate of credit card losses has been climbing for any given level of unemployment.

To take the government’s more optimistic side of the argument, the tendency of unemployment to mount far and long after a recession has ended was observed only in the instances of the two most recent prior recessions, each of which was much more mild than the present one.  As the table of recessions during the past 60 years shows, the peak unemployment rate exceeded the level when a recession ended by more than 0.2 percentage points (ppts) in just one of eight cases between 1949 and 1982.  The table documents the jobless rate’s pre-recession low, end-recession level, eventual peak and date of that peak.

Recession Ended Prior Low End-Recession Peak Rate Date of Peak
10/49 3.4% 7.9% 7.9% Oct 1949
05/54 2.5% 5.9% 6.1% Sept 1954
04/58 3.7% 7.4% 7.5% Jul 1958
02/61 4.8% 6.9% 7.1% May 1961
11/70 3.4% 5.9% 6.1% Aug 1971
03/75 4.6% 8.6% 9.0% May 1975
07/80 5.6% 7.8% 7.8% Jul 1980
11/82 7.2% 10.8% 10.8% Dec 1982
03/91 5.0% 6.8% 7.8% Jun 1992
11/01 3.8% 5.5% 6.3% Jun 1993

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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