Someone I had not spoken to in years call me last week to catch up. In the course of the conversation, the caller, who is self-employed, made an off-handed comment about the economy being in a depression and how we needed to become self-employed soon. My one pet peeve lately is the rather liberal use of the term depression and how short of memories we all have.
Thus, I wanted to give some context of the current downturn vs. the early 1990′s using unemployment numbers as opposed to some media driven hysteria. My sources are the U.S. Department of Labor and Stats Canada. I noticed I can’t link to the specific search pages (the searches expiry as a link page) so I had to give you the general page.
What I have done is looked at when unemployment numbers begin to trend upwards and attempted to determine when they trend back down and counted the # of months the unemployment rate was high.
I am using as my assumption my economics 100 course in undergrad that 5% unemployment is a desirable unemployment rate- not too low to trigger inflation, not too high to slow the economy. However, I will make an allowance that a healthy unemployment rate is somewhere in the 5%’s.
United States
In March 1989, the unemployment rate was 5.0% . From this date to June 1990, the unemployment rate fluctuates in the 5%’s until hitting 5.2%. After that month, the unemployment spikes to 5.5% and begins an upwards and steady accent. I will mark July 1990 as the begin of steady job losses. Here are the average monthly unemployment rates until the rate settles back into the 5%’s:
July-Dec 1990: 5.92%
1991: 6.85%
1992: 7.49%
1993: 6.9%
Jan 1994-Aug 1994: 6.3% (the unemployment rate decreases to 5.9% in Sept. of that year and begins a decent for the remainder of 1994 and onward).
That’s 50 months between the unemployment rate begin a steady climb from 5.2% back to 5.9. Peak monthly unemployment occurs in June 1992 at 7.8%. This is not to suggest that it will take 50 months to a full job recovery but it did take 24 months from the commencement of the upward trend to peak unemployment in June 1992. After that, there is a steady, albeit slow, recovery on the job front.
Thus, based on the 1991 precedent, there’s a 24 month span of rising unemployment before the rate hits peak and drops (I understand that the unemployment rate does not differentiate between full and part time jobs and good jobs or bad jobs. This is merely a snapshot).
Canada
I had a much more difficult time finding monthly unemployment rates in Canada. I have had to rely on annual unemployment rates so the analysis is much more broadly based. In 1989, Canada’s unemployment rate was 7.5%; the lowest rate in the 1980′s. Thus, Canada was not in an optimal full employment state when the economy started going south.
The unemployment rate then begins the following upward trend of annual unemployment rates:
1990: 8.1%
1991: 10.2%
1992: 11.2%
1993: 11.4%
In 1994, the annual unemployment rate drops to 10.4% and drops every year until 2000. Because of the imprecise detail of the data, it appears that the Canada took longer to hit its unemployment peak (1993 as opposed to 1992) and the recovery took longer to unfold. In fact, it took until 1999 for the Canadian unemployment rate to get back to where it was in 1989- a full 10 year recovery!
There are a wide variety of academic sources which studied Canada’s slower job recovery. I cite one factor below.
Today
The U.S. unemployment rate is at 7.2% at the end of December 2008. There has been a general tread upwards since May when the unemployment rate jumped from 5.0% to 5.5% with two big 0.4% leaps in the rate in August and December from the previous months. If you want to start the clock running on when unemployment begins to rise, May 2008 would be a good time for the starting point.
If you believe this rescission will unfolded similarly as 1991, that would make approximately spring 2010 when the unemployment rate peaks and begins to fall. This is based purely on a sample size on one so keep this in mind.
The Canadian unemployment rate stands at 6.6% as of December 2008.
What does this all mean?
Few random observations:
- The Canadian recovery in the 1990′s took much longer in the U.S. for many reasons. One was Canada was running massive debts and deficits prior to that time and there was a very painful transition to balancing budgets. The government’s lack of financial flexibility to stimulate the economy most likely slowed the recovery. Will this happen in the U.S.?
- It is way too early to press the depression button. Perhaps the “holy cow, its 1992 all over again!” button can be pressed (the 1991 recession was brought on in part by a speculative real estate bubble bursting and savings and loan bailouts- in smaller scales).
- Just hope this does not become the 1982 recession. I took a quick over-view of the 1982 recession and it was ugly by any comparison. For example, the American monthly unemployment rate was over 10% from Sept. 1982 to June 1983 and the American Central Bank Prime Rate was 12% in Oct. 1982 (source is WSJ); Canadian unemployment rate went from 7.6% to 11% in 1982; Bank of Canada Prime Rate was 11.53% in Oct. 1982. In other words, you had the worse of both words in 1982, high unemployment and high interest rates.
…is this another “normal” recession and, our collective memories being so short, we don’t remember what a recession truly feels like? I sit on in the “let’s not get hysteria” camp and believe what we have is a good old fashion recession, of which we have no collective memory of so we are paniking (think of your advisor in their 30′s or 40′s; they would have been in school during 1991 and not experienced the full force of the recession). Howerver, time will tell…