Analysis: Good News On Jobs, But Will It Last?
(Also posted at NPR and ECRI) - This morning's news of a drop in the unemployment rate to ten percent is a welcome development. It was presaged by earlier strength in reliable leading employment indicators, which suggest that this improving pattern will persist next year. In November employers cut the fewest jobs since the recession began, but how should Americans interpret this information? With unemployment in double digits for the first time since 1983, many still worry about the jobless recovery.
The post-recession dip in joblessness is the good news. But, looking ahead to the later phase of the expansion, the post-World War II period shows disturbing cyclical patterns.
The jobless rate usually sees a sizable drop during the economic recovery — and bigger recessionary spikes in unemployment are typically followed by larger declines during the first year of improving unemployment. So it would be no surprise if, a year after the unemployment rate begins to drop, it falls to the nine percent range.
The real problem is that the rate of decline in joblessness slows during the rest of the economic expansion. The annual postwar pace of decline in unemployment during these periods has been reasonably uniform, the median being 0.5% a year.
If that pattern persists, the U.S. economy needs to keep expanding without interruption until 2020 for unemployment to fall to its pre-recession low of 4.4%. Should the next recession arrive earlier, as we suspect, it will take much longer. The implications constitute nothing short of a wake-up call for policy makers who promise to get job growth back on track.
Since World War II, there has been a clear easing pattern in the trend rate of economic growth during expansions, culminating in the 2001-07 expansion, which showed the slowest trend rate of growth on record — especially in terms of jobs. Ominously, during expansions following the initial year of revival, growth in non-manufacturing employment has been falling in a parabolic fashion since the 1970s. A continuation of this pattern would lead a much worse job market than almost anyone expects.
The "great moderation" of business cycles once extolled by many economists, including Chairman Bernanke, is history. The trend rate of growth is shriveling. In other words, business cycles are back with a vengeance.
The real risk is of more frequent recessions repeatedly aborting cyclical downswings in unemployment in coming years. Some consolation comes from the fact that past performance does not dictate destiny, and extrapolation from past patterns is not a reliable forecasting method, especially if the pattern is about to change.
It is at least conceivable that either enlightened policy measures, or good luck, or both, will result in a decisive break from these patterns. The silver lining is that even an economy dipping in and out of recessions and keeping joblessness cycling near historical highs is a navigable one for decision makers who keep a closer watch for recessions and recoveries.
By Lakshman Achuthan and Anirvan Banerji:
- Lakshman Achuthan is the managing director of the Economic Cycle Research Institute. He is a member of Time magazine's board of economists, and co-author of "Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy."
- Anirvan Banerji is the director of research for the Economic Cycle Research Institute, a RealMoney.com contributor and co-author of "Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy."
- more about ECRI
- Oct 30, 2009: The Economic Recovery is Sustainable Says ECRI
- July 31, 2009: ECRI Predicts End of Home Price Downturn
- April 3, 2009: Upturn in ECRI's WLI Growth Rate Says US Business Cycle Recovery Ahead
- March 28, 2008: ECRI Calls it "A Recession of Choice"
- January 05, 2008 ECRI Says Fed Has Room To Cut Rates Despite Fears of Inflation