Peak Unemployment?

The turnaround in employment numbers that we had hoped for has not materialized. Not even close. With today's fresh BLS numbers, the unemployment rate jumped up sharply by 0.4 points -- the kind of spike normally only seen in the darkest months of a recession. When a number of 0.4 points or higher is reported, the odds of that month being designated as recessionary are 88%, implying it is unlikely the NBER will declare the recession over at this point (whenever they get around to making such a declaration).

To put this in perspective, the net change in the unemployment rate is 5.3 points since the recession began in December 2007, surpassing any other modern recession. The following chart considers all recessions since 1970 (and merges the early 1980 double-dip recession into one observation):

 

As bad as this chart looks, the media seems to be underreporting the damage. Practically every piece of news coverage reports the overall level of unemployement as "a 26-year high." That misses the more important peak in net change, which is at something like a 50 or 80 year high. The baseline is not a zero rate, but the contemporary trough (or natural rate) which varies over time. Hence, the chart above. Moreover, any assessment of the deteriorating employment situation should recognize this is in the face of massive stimulus (monetary especially) which is in sharp contrast to earlier recessions, notably '74 and '80-82. Finally, the weak housing situation which many believe precipitated the current financial chaos is likely to suffer further setbacks if joblessness persists.

Another perspective comes from the simple payroll count (unadjusted for population or real-time) in the next chart:

The jobless recoveries of 1991 and 2001 were abnormal, but look like tea parties compared to this downturn. And this unemployment shock has not even peaked yet.

Implications for policy?

Unfortuantely, the legilslative focus on stimulus has emphasized federal spending which was extremely slow to get up and running, and is of questionable effectiveness. White House economists promised that passage of the stimulus would keep the unemployment rates below 8 percent, and forecast it would be settling down to 7.7 about now. Instead, it is 10.2 and rising. (Below is the infamous stimulus sales chart).

 
Whether this or their fault or not is irrelevant -- spending a trillion dollars in stimulus that has a perceived negative effect is unforgettable. And alternative strategies (payroll tax cuts and holidays) have been neglected. GM was nationalized while smaller firms were left to fend for themselves. My colleague Dane Stangler has done heroic work digging into Census data on firm age and job creation, showing that almost all new employment comes from firms younger than 5 years (link to his new report published yesterday)

The biggest loser in all this? Health care reform. If reform had been legislated during a non-recessionary year, I suspect it would have enjoyed bipartisan support and been passed. Instead, the timing could not be worse. Partisan tensions are inflamed which has driven the legislation far left of center. I find it hard to believe any health reform legislation -- which is desperately needed to control deficits and relieve entrepreneurial firms -- will cross President Obama's desk. That's too bad.

Comments

[bondwooley]

Since the government can't solve the problem, it's time the people faced unemployment with our own ingenuity:

http://bit.ly/ozqT6

(satire)

[Ann Pieper Eisenbrown]

Thank you for a sobering analysis, and for your spot-on commentary about the lack of real results from significant stimulus spending.

One clarification that seems to be needed nation-wide, though, is that the gorvernment is debating health INSURANCE reform...not health CARE/DELIVERY/COST reform. And that's really where we need reform/transparency....although the private sector is actually making progress in some of those areas...

[Lesa Mitchell]

Thank you Ann for making a very important distinction. Great post Tim!

Hope everyone saw the Stangler, Litan, Schramm op ed in Friday WSJ on topic of jobs.

[Cory]

Tim, great analysis. YOur obviously a smart guy from reading your bio but I fail to see how you think Obama/Reid HC reform will fix this problem. In its curren form the HC bill will not help job creation. Why didnt you address this...or at least mention it. Obamacare is not focused on helping small businesses but caters to Unions! Did you read that tt the last minute recently in one of Reid/Pelosis midnight behind closed door sessions Reid bowed to the Unions and significantly reduced the number of employees from approx 50 to 10 (an est.) that it will take to be exempt from the Federal Penalty now required if you dont choose to use Obamacare in your small business! Summary...Obamacare will not help small businesses or anyone! We wil pay for it in other ways through other taxes and the states will pay for it too who of course will pass those costs to their small businesses and people in different ways! Why dont you mention cutting taxes (small business taxes & personal taxes) as a way to spur job growth?

Cory R
West Point Grad
Small Business Owner
Tea Party Patriot

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Tim: As I wrote on my blog, Truth on the Market, I think Tyler is pretty far off base with this one. See http://www.truthonthemarket.com/2009/04/28/what-does-tyler-know-about-law-and-economics-anyway/

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