Of Unemployment Peaks and Economic Troughs

One of the great delights of doing research is when results, rather than confirming what you thought you knew, provide a different answer and allow you to gain new insight.  There’s been much talk of the need for additional stimulus (beyond the tremendous amount already in place which is discussed in “Whole Lotta Stimulatin’ Going On“).  Part of the rationale is the desire to keep consumption going by maintaining employment.  The assumption was challenged in a good column in Forbes the other day.  Looking back historically, the record of the timing of economic bottoms and unemployment peaks is quite surprising.  The chart below illustrates the unemployment rate (vertical axis in percentage terms).   

Unemployment Peaks, Economic Troughs

Unemployment Peaks, Economic Troughs

The notation at each cyclical spike denotes the lag between the official end of the recession (the economic trough) and the peak of unemployment.   The key insight is that unemployment peaks after the economy bottoms.  While it is obvious that productive employment is a good thing for the economy, it suggests that an economic turnaround is not directly tied to lowering the unemployment rate.  This suggests we should move cautiously in considering programs to boost employment  if the primary rationale is supporting consumption.  The above data suggest that turning around unemployment is not the key to turning around the economy — rather, employment statistics follow economic activity and often lag by long periods.

There are lessons here for investors as well.  In most past cycles, the capital markets anticipate economic recoveries.  If employment lags economic recoveries, which in turn lag market recoveries, this suggest that the stock market may rally well before unemployment peaks.  If this holds true this cycle, investors can expect their stocks to gain even as the unemployment situation worsens.  As the headlines will focus on increasingly dire employment data, investors would do well to keep in mind the old Wall Street adage, “markets climb a wall of worry.”


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2 Responses to “Of Unemployment Peaks and Economic Troughs”

  1. The Crisis of Capitalism (again) « (in)efficient frontiers Says:

    […] is this crisis worse?  Certainly, the economy has yet to feel the jobless rates of the 1982 recession.  The misery index is less than half of its 1980 highs.  How about […]

  2. Glimmers of Good News « (in)efficient frontiers Says:

    […] These are among the earliest indicators of change (as opposed to the highly publicized but lagging indicator of unemployment rate).   I would put the improvement in these indicators in the category of “necessary but not […]

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