Unemployment: A Lagging Indicator?

By Peter Van Schaik

As the unemployment rate continues to climb during the current recession, we

frequently hear and read in the financial news that unemployment is a lagging
indicator, destined to continue rising after the official end of the recession.
Historically, however, the unemployment rate is more of a coincident, and not
lagging, economic indicator.

In seven of the last ten recessions the unemployment rate actually started
falling at, or near, the end of the recession. Only in the last two recessions did
we see a significant deterioration in the employment situation after the recession
ended and after the recession of December 1969 - December 1970 unemployment
basically drifted sideways for about a year before significantly improving.

At the end of the November 1948 – October 1949 downturn the unemployment rate
was 7.9%. This was the high of the business cycle and the unemployment rate
started a downward trend in December, falling to 2.5% in May and June of 1953.

In the July 1953 to June 1954 recession the unemployment rate was 5.6 percent
as the recession ended. It did continue to rise for the next three months, peaking
at 6.1% in September of 1954, but the one half percent rise, and the fact that the
unemployment rate climbed for only three months after the recession ended, leaves
the increase relatively statistically insignificant.

As the August 1957 - May 1958 recession came to an end the unemployment rate
hit 7.4%. It fell to 7.3 percent in June, rose to 7.5% in July1958, then
proceeded to decline until February 1960 when it bottomed at 4.8%.

When the April 1960 - March 1961 recession ended the unemployment rate stood
at 6.9%. It did continue to rise until May of 1961, but it peaked in May at 7.1%
which was barely changed from the March number. After May it fell to 3.4% in
September 1968 where it remained until May of ’69.

During the December 1969 - December 1970 the unemployment rate climbed to 6.1
percent as the recession ended. It stayed between 5.8 and 6.1% until December of
1971, then it started its downward spiral until it bottomed in October of 1973 at
4.6 percent.

As the November 1973 – April 1975 recession came to a close the unemployment
rate was 8.8%. It inched up to 9 percent in May, then it headed down, eventually
bottoming in May of 1979 at 5.59%.

The short downturn of January to August of 1980 saw the unemployment rate
peaking at 7.8% in July, one month before the recession officially ended. The
second half of the double dip recession, from July 1981 to December 1982, saw
unemployment peaking at a postwar high of 10.8 percent, which it hit in November
and December of 1982. But as the recession ended in December the unemployment rate
peaked and it dropped to a low of 5.2% during June 1990.

However, the recession of July 1990 – April 1991 saw a significant change.
During the official recession, as determined by the National Bureau of Economic
Research, the unemployment rate peaked at 6.8 percent in March of 1991. It then
continued its uptrend until it reached its ultimate high of 7.8 in June of 1992,
14 months after the end of the recession.

The March to December 2001 downturn saw a relatively small increase in the
unemployment rate after the recession ended but the increase was significant
because of the length of time after the end of the recession before the
unemployment rate peaked. During the recession the unemployment rate hit a high of
5.7% in December. It continued to climb until June of 2003 when it ultimately
peaked at 6.3 percent: a relatively small gain but it was a year and a half after
the recession’s end before the employment situation started to improve
consistently.

Historically, the unemployment rate peaks fairly close to the recession’s

end. It can hardly be considered a lagging indicator. But what does this imply for
the current recession?

Although statistically there is no reason to believe the employment situation

will continue to deteriorate after the current recession’s end, there is a reason
to believe it will. Productivity gains in our economy mean fewer of us are
employed providing what we would consider the necessities of life. During a
recession most of us reduce our consumption of the extras and keep the purchase of
the essentials to a minimum. This forces the unemployment rate higher. We only
slowly start buying the non-essentials after the economy bottoms and we start to
feel secure once again in our jobs. When you factor in the volume of goods we
currently import that we used to manufacture onshore, it is easy to see why
employment is slower to increase after the downturn ends than it was in earlier
recessions. We simply buy less of the goods and services we produce until well
after the recession bottoms.

You can see current charts of the unemployment rate, the percent change in
non-farm employment and the employed/unemployed ratio on my website:
http://jpetervanschaik.googlepages.com.

Copyright 2009 – Peter Van Schaik