Comparing Historical Unemployment Rates During Recessions ~ market folly

Friday, January 23, 2009

Comparing Historical Unemployment Rates During Recessions

Hat tip to Barry Ritholtz for posting this up earlier. In the chart below, the red highlighted areas obviously indicate recessions. What's interesting to note is that in each major recession, a peak in unemployment has pretty much signaled the end of that specific recession, give or take a few months. Within the current recession, you can see that unemployment has been peaking. The questions become: 'how long does the recession last?' and subsequently, 'where does unemployment peak?'

Using very rough estimates (emphasis on the 'very rough' part), you can ballpark that the rise in unemployment rates during recessions has topped off around 4% or so during each major recession. As such, the recession in the 80's saw unemployment surge from 7.5% to nearly 11%. During the late 40's we saw it spike from around 4% to nearly 8%. In the 70's it rose from 5% to 9%. And so forth.

(click to enlarge)

Within our current recession, we started with around 5% unemployment or so. And, by this argument, one could argue that we would need to see 9% unemployment to signal the beginning of the end of this pain. But, this assumption is problematic in that it leads us to yet another question: 'how does this recession compare in terms of severity?' We would argue that since we perceive it to be the worst crisis since the Great Depression that normal circumstances would not necessarily apply here. And, as such, we could possibly see unemployment rates as high as 10-11%. But, again, we must stress that this is mere speculation on our part based on very rough assumptions.

The one thing that resonates from the chart is the fact that a peak in unemployment is usually a leading signal that the recession is drawing to a close. So, look for the unemployment figures to turn rapidly in the other direction to tip you off. When this occurs, things will obviously be improving (duh, common sense). Just keep in mind that since markets are forward looking mechanisms, they typically lead the exit of the recession. If the markets start (and hold) a solid rally, look for this to be a leading indicator by 4-6 months or so.

Oh, and to all those wondering... No, we don't think that will be anytime in the near future.

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