Nathan Scandella (personal)

Lagging Unemployment?

There has been a lot of momentum in the last month for the idea that we've bottomed (or at least the stock market has bottomed), and the economy is preparing to rebound. That notion is utterly ridiculous. We are at the start of a Depression, not the end of a recession.

Those who subscribe to the green shoots theory like to point to the last two months' stock market rebound, falsely believing the retail stock market to be The Economy, when in fact it is one small group of investments, that are both tightly tied to perception (as opposed to reality) and a very noisy indicator. These polyannas need to remember that the stock market rallied briefly around Christmas time, and reached significantly higher "heights" than it is currently at. This was not the onset of recovery, and the stock market shortly corrected itself in February and March.

Amongst the most damning evidence for the recovery theory is the continually horrible unemployment figures. The optimists dismiss this, because, as they say, "Unemployment is a lagging indicator, and won't reflect the recovery until after it's underway, at which point the stock market will have recovered most of what it had lost". Nonsense. Historically, the unemployment data has been a lagging indicator. However, this is much more likely to be the case in a less severe economic downturn, where a mild recession is marked by gradually reduced workforce, and then a slowly rebuilt jobs market as conditions improve. In this scenario, there are no drastic, rapid changes in economic conditions, and the events are not dramatic enough to cause companies to act quickly (such as laying off workers). This downtown is completely different. Until September 2008, many of us were completely unaware that a major downturn was imminent. The discussion focused on whether there would be a recession at all, not whether a Depression was looming. Then, Lehman Brothers collapsed in September, banks quickly froze credit, and the whole world took notice. But, that's when the layoffs began in earnest. Before that, corporate bean counters had no idea that we were heading into such dangerous territory. So, entering this downturn, employment has been a lagging indicator, as layoffs have been made reactively, in conditions of market panic.

Now that we're in the recession (soon to be technically a Depression), the unemployment level is very much an integral factor relating to when a recovery can occur, not merely a lagging indicator that it already has. Seventy percent of our economy is based on consumer spending, and consumers don't increase spending when they fear their job is about to be lost. They begin to spend again when:

• Unemployment has leveled off, which it's not even close to now. We are still shedding more than 500,000 jobs per month, with virtually no rehiring.


• Time passes. Certain expenditures (cars anyone?) can be delayed for limited periods of time, but not put off indefinitely. It's going to take more time before many Americans are forced to spend again.


• More time passes. Part of the recovery is the gradual abatement of panic, and the people's indifference to more bad news. While we're getting closer to that point, we're only eight months into crisis mode. It'll take a little longer for this nation of frady-cats to be willing to stick their necks (and credit cards) all the way out again.

There are a couple other reasons why Unemployment is not necessarily going to be a lagging indicator during the next recovery. First of all, businesses have adapted to make decisions more quickly than they used to. We saw that last fall, as layoffs very quickly spiked as soon as the world caught on. While millions were not instantly laid off, the rate of change of employment (mathematically, the first derivative) changed very quickly. During the recovery, a relatively rapid change in the rate of change of employment should occur, as the consensus becomes a solid feeling that we're over the worst. This can't be a sentiment driven solely by talking heads in government and the media. Optimists look at the second derivative of unemployment levels, but there's absolutely no justification for taking this leveling-off-of-the-rate-of-job-loss to indicate a recovery.

Aside from increased attention to current market conditions, corporations now have the flexibility to quickly change their workforce levels due to the relative lack of influence of labor unions. Despite the high-profile cases in Detroit, in general, labor unions have less power now then they have had for years. This allows companies to fire, and hire, more responsively, without having to cautiously work around the union rules for releasing existing employees. This is significant during the recovery as well. If a company brings in employees into a union, they need to have a higher level of certainty that market conditions really are on the mend, because if the indicators look differently in 90 days, they're now burdened with union labor that's harder to let go again. Having the freedom to "hire on a whim" allows employers to take chances on the recovery being real, which actually winds up reinforcing the reality of any recovery already in progress.

So, don't buy the "conventional wisdom" that Unemployment is a lagging indicator, and thus can be completely ignored right now. It's an important part of a recovery in this economic climate, and the bad numbers are simply an inconvenient truth for the crowd who have resorted to lying their way to recovery, rather than supporting sound policy changes.

Posted at 12:23PM May 25, 2009 by Nathan in Economics  |  Comments[1]