Thursday, November 13, 2008

Can We Use 1970s, 1980s or 1990s as Benchmark?



The top chart above shows today's updated WSJ consensus forecast (based on 55 forecasters, data here, article here) for the U.S. jobless rate of 7.7% in December 2009, up from the 6.8% forecasted previously (see CD post here).


Let's say the forecasters are correct and the U.S. unemployment rate rises to 7.7% by the end of next year. Hopefully, that would be close to the peak unemployment rate for the 2009 recession, and an economic recovery would be in place by the last half of 2009 when the consensus forecasts for real GDP growth are +1.6% for QIII and 2.1% for QIV.

If those assumptions are correct that: a) unemployment will peak at 7.7% in December 2009, and b) the U.S. economy will enter an economic expansion by the second half of 2009, the relevant comparison of today's economic conditions is NOT the 1930s and the Great Depression, but the recessionary conditions of the 1970s, 1980s and the 1990s (see bottom graph above).

Bottom Line: Under the consensus assumptions of the WSJ panel of 55 forecasters about the coming economic conditions in 2009, the comparisons to the 1930s and the Great Depression seem fantastic, exaggerated and alarming. As I mentioned before: only until we experience a 9% jobless rate like the 1970s, or the double-digit jobless rates of the 1980s, or the 7.8% jobless rate of 1991, should we start making comparisons to the 1930s.

Until then, let's use the 1970s, 1980s or the 1990s as the benchmark comparison decades for any discussion of "the worst economy since...."


10 Comments:

At 11/13/2008 11:50 PM, Anonymous qt said...

N.B. From Bob Farrell's tips:

"When all the experts and forecasts agree – something else is going to happen."

How many of these soothsayers predicted the present financial crisis a year ago? Under the present volatile circumstances, is it even possible to make predictions with any accuracy? Even the FED and Treasury are having problems so it would appear that art of financial predictions is somewhat problematic at the moment.

 
At 11/14/2008 12:54 AM, Anonymous Anonymous said...

1) Look at U-6. Already double-digit.

2) Based on your recession forecast accuracy (i.e., entirely wrong) I am now confident we will move above 10% on U-3.

Thanks

 
At 11/14/2008 8:09 AM, Blogger Ironman said...

This comment has been removed by the author.

 
At 11/14/2008 8:11 AM, Blogger Ironman said...

Unemployment is going to increase from today's levels. Period. That much is ensured by the next scheduled hike in the federal minimum wage for July 2009. The most affected will be teenagers (Age 16-19) and young adults (Age 20-24).

How do we know? Because they're the most affected by job losses today. Since total employment (all jobs, not just non-farm payroll) peaked in November 2007, these two age groups represent 57.3% of the total decline in jobs since. That's especially remarkable in that these two age groups make up just 12.0% of the entire U.S. workforce.

How we know that the minimum wage increases are behind the job losses is described here. The post linked earlier in this comment has more up-to-date charts.

 
At 11/14/2008 8:16 AM, Anonymous Anonymous said...

As a public service to true believers I can offer a link to this Survival Guide to Homelessness

 
At 11/14/2008 9:44 AM, Anonymous qt said...

Ironman,

Good post. Agree that unemployment will definitely rise and the youth demograph is the most vulnerable.

There are also certain sectors such as construction and related fields (ie. architecture, engineering) which are particularly susceptible to recessionary pressures.

Forecasters have not been particularly successful in gauging the extent of the present crisis. Beyond educated guesswork, what basis is there to support the forecasted unemployment rate aside from historical comparison? Just wondering.

 
At 11/14/2008 11:13 AM, Blogger Ironman said...

qt,

Difficult to do. One with sufficient time might consider starting here, then working backwards from inflation forecasts.

 
At 11/18/2008 9:29 AM, Anonymous Anonymous said...

Economists must not be reading the newspapers that are just now announcing massive new layoffs. We are just at the front end of the layoff parade. The idea that we are near the peak is ludicrous. I fully expect a 1980's 9%-10% unemployment rate that will not turnaround unless and until a massive stimulus plan is effectuated(and not a mere $150 billion which is only 1% of our GDP). It will likely take all of 2009 before we see any pickup in employment. The bottom line - you and your fellow staticians who don't live in the real world are way too optimistic.

 
At 6/05/2009 3:00 PM, Anonymous Anonymous said...

Latest unemployment numbers: 9.4%

 
At 1/08/2010 7:22 AM, Blogger norrin said...

at this point, we need to add 100K jobs a month just to sustain the 10% level. If the unemployment level stays above

 

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