Unemployment: Both a Leading and a Lagging Indicator

Unemployment has traditionally been considered a lagging indicator in a recession: the idea was that unemployment rises after economic growth falls off, and doesn’t recover until growth has picked up.

In the upcoming issue of D&S, John Miller points out that this time, the job losses struck first, so much so that the NBER (National Bureau of Economic Research, the official recession-dater) abandoned the standard metric (two consecutive quarters of falling GDP) and instead dated the recession to December 2007 based on the pace of job losses. In other words, unemployment is suddenly a leading indicator.

Arpitha Bykere comes to the same conclusion in Nouriel Roubini’s RGE Monitor:

Slower pace of job losses in the U.S. in April and May is welcome news but it hardly means that the labor market and households are out of the woods. The 345,000 job losses seen in May are still more than jobs lost during any month in the last two recessions. … And the 600,000-plus jobs lost in the late 2008 and Q1 2009 will continue to impact consumption and the financial sector.

The labor market is considered a lagging indicator and this time too we will see a sluggish recovery in job creation—firms will first move workers from part-time to full-time and overtime employment, increase labor hours and hire temporary workers before hiring new workers. But in a credit and consumer driven recession, the labor market has well become a leading indicator so that job losses have to come down significantly to see a recovery in consumption and the economy in general.
Some green shoots in the labor market were visible in early April when initial jobless claims peaked and the pace of job losses slowed from the 600,000-plus range in Q1 2009 to 504,000. However, for the labor market (and therefore the household sector) to improve significantly, the pace of job losses needs to slow to at least 100,000 to 200,000 …

The increase in the unemployment rate by 0.5% to 9.4% in May is not surprising given the increase in the labor force. But higher labor participation shouldn’t be mistaken as a growing optimism among consumers that they will be able to find a job in the so-called ‘bottoming’ economy. When workers are laid-off, they have access to mortgage equity withdrawal, bank credit and/or 401(k). But this time around, labor income is the only source for households to finance consumption and pay down debt. Facing wealth erosion, high debt burden and tight credit conditions, more households including senior workers are looking for work, even if it is part-time or at much lower wages. …

Read the whole analysis here.

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