The October 2009 Employment Situation and its Implications for the Economy

Serge L. Wind, Ph.D.

The October 2009 unemployment rate on a seasonally-adjusted basis was released by the Bureau of Labor Statistics (BLS) on November 4.  The jobless rate was 10.2%, the highest unemployment rate in 26 years, as depicted in Chart 1.  While the peak of the recession seems to have passed, and economists in a half year may declare the recession is over now, employment always lags other indicators, like growth in real gross domestic product (GDP). The unemployment rates are 15.7% for African-Americans, 9.5% among white Americans, and 13.1% for Hispanics.  The jobless situation has been particularly harsh for young workers, with unemployment rates of 19.1% for workers 16 to 24 years old, and 30% for young African-Americans.

Educational attainment is inversely related to unemployment rates.  The jobless rate for people without a high school diploma is currently 15.5%; those with bachelor’s degrees or higher are experiencing a 4.7% unemployment rate.

Michigan had the highest jobless rate at 15.1%, while states most severely affected by plunging housing prices in 2007-08 included Nevada (with a 13.0% unemployment rate), California (12.5%, a record high), Florida (11.2%) and Arizona (9.3%).

The underemployment rate – which also counts part-time workers whose hours have been cut or would like to be working full-time – was 17.5% in October, its peak since 1970.  The latter year was the earliest year for which The New York Times’ economics columnist David Leonhardt, working with BLS economists, recreated this broader measure.  The previous peak was 17.1% in December, 1982.  This rate is almost certainly at its highest level since the Great Depression.  The implications are that more than one of every six workers was unemployed or underemployed in October. 

Over 7 million jobs have been lost since the recession’s official inception in December 2007, although the October loss of 190,000 jobs represents a marked slowing in monthly job losses since early this year.  Nearly 16 million people are now unemployed, with 5.6 million now out of work for more than half a year. 

The recession was deeper than previously thought, with real GDP growing only 0.4% during 2008, compared to the earlier-published figure of 1.1%, as restated by the Bureau of Economic Analysis.  Real per capita GDP declined 1.3% on an annualized basis over the first three quarters of 2009, with a first quarter annualized decrease of 6.4%.  This recession is already the longest since the Great Depression of the 1930s. 

The severity and length of this recession are also reflected in job losses measured as a percent of employment, which have been greater than the six previous, post-1974 recessions.  As seen in Chart 2, reproduced from The New York Times’ online Economix blog, the trough of the 2000’s recession has not been attained 23 months after its inception.  [The vertical axis shows the ratio of that month’s nonfarm payroll to the nonfarm payrolls at the start of each recession.  Catherine Rampell, The Times’ economist, notes: “Because employment is a lagging indicator, the dates for these employment trends are not exactly synchronized with National Bureau of Economic Research’s official business cycle dates.”]

However, we maintain we are not merely experiencing another cyclical economic crisis characterized by a deep recessionary period.  Rather, we believe the current financial crisis can properly be viewed as a systemic banking crisis due to its sharp credit contraction, preceded by a housing market-price bubble and credit expansion.  It was therefore felt useful to view the current liquidity and capital crisis in the context of 15 prior systemic banking episodes.  This setting enables an assessment of the possible course of today’s financial crisis. 

The unemployment rate is likely to peak at 11.5 percent if today’s crisis turns out to be similar to past credit crunches.   The 11.5% peak rate is expected based on the trough-to-peak 6.6 percentage-point increase in the unemployment rate associated with the benchmark for 14 banking crises, as shown in Chart 3.  The trough unemployment rate of 4.9% was recorded in December 2007, the official start of the recession.  While the unprecedented magnitude of government intervention may blunt the anticipated unemployment impact, our observation, based on past banking events, is not inconceivable, as indicated below.

A continued increase in the unemployment rate in 2010, likely extending to 2011 before peaking, has several important implications.

Many economists now expect the recovery to be very slow, lasting months, if not years.  And on November 16, Federal Reserve chairman Ben Bernanke warned of a likely slower economic recovery next year due to high unemployment and the continuing reluctance by banks to offer loans.

The personal savings rate as a percent of disposable personal income rose to 4.0 percent of disposable income in the first three quarters of 2009, as depicted in Chart 4.  The savings rate had dipped to an average annual figure of 1.8 percent during the latter years of the housing boom (2005-07) largely due to home equity loans from a post-dot.com-implosion average annual rate of 3.5 percent during 2002-04.

Consumer spending accounts for 70% of U.S. economic activity.  The Conference Board Consumer Confidence Index®, which had declined in September, weakened further in October, affected mainly by the worsening labor markets.  If consumers continue to save at relatively high rates due to the increasingly unattractive job market and the thriftier behavior induced by their housing and investment losses in 2007-08, recovery from the recession may be brief.

The possibility looms of a “double-dip” recession, with recovery turning into recession again.  Concern is voiced by Nouriel Roubini that the economy might tip into another recession coupled with either deflation or inflation, depending on whether taxes are raised and spending cut to reduce the large fiscal deficits or the large budget deficits are maintained, leading to inflationary pressures.  Were households to maintain or increase their savings rate, commodity prices continue to rise, some forms of the present government stimulus spending program of $787 billion recede in 2011, and businesses finish restocking their inventories – along with the potential sensitivity of the economy to withdrawal of the country’s large monetary and fiscal stimuli – the risk of a “double-dip” or W-shaped recession is palpable.  This risk is shared by Roubini, who predicted the credit crisis, and a minority of other economists, including Martin Feldstein, former head of the National Bureau of Economic Research and President Reagan’s chief economic adviser, and Paul Krugman, the Princeton economist, Nobel Prize winner and New York Times op-ed columnist.

Foreclosures in prime and Alt-A mortgages are accelerating, beginning in the second quarter of 2009, due to the current surge of foreclosures caused by rising unemployment and underemployment.  Properties with foreclosure activity are at their highest level in the third quarter of 2009 since the mortgage crisis began, as shown in Chart 5.  The third-quarter delinquency rate is the highest since the Mortgage Bankers Association began keeping records in 1972.  High-quality prime loans with fixed rates constitute the largest segment of new foreclosures and represented one-third of the new foreclosures begun in the third quarter.  While this type of loan has long been considered the safest, jobless homeowners usually cannot pay their mortgages.  “Many analysts say they believe that foreclosures, instead of peaking with the unemployment rate as they traditionally do, will most likely be a lagging indicator in this recession, according to the New York Times’ David Streitfeld. Moody’s Economist.com expects 60% of 2009 foreclosures to be caused primarily by unemployment, versus 29% last year.  This acceleration in foreclosures could exacerbate bank losses over a longer period.

The government's stress tests for banks used 10.3% as the worst-case unemployment rate for 2010, which, in view of the October 2009 rate of 10.2%, is clearly an insufficiently-low figure.  As unemployment and wage figures continue to worsen,  banks may face increased losses in consumer credit card and mortgage loans.  Coupled with troubled commercial real estate, banks’ reserves against future loan losses may be stretched.  As evidenced by the troubles at the commercial lender CIT, small corporations are increasingly defaulting on loans, also impacting some banks.

A vicious cycle with a feedback loop may continue to develop, with rising unemployment rates leading to heightened foreclosures, which, in turn, causes economic activity to slow – partly due to an increased supply of homes causing a continued decline in home prices and partly attributable to increased bank losses from prime mortgages and consumer credit – further exacerbating unemployment.        

And the economic slowdown, coupled with rising commodity prices, the diminishing impacts of the stimulus program, and the potential effects on the economy of withdrawal of the country’s large monetary and fiscal stimuli, may increase the risk of a double-dip recession.

                                                                                                November 20, 2009

Sources

Andrews, Edmund (2009). “Continuing Unemployment Is Predicted by Fed Chief,” New York Times, November 16, 2009.

Bureau of Labor Statistics (2009). “Civilian Unemployment Rate” and “Personal  Savings Rate as a Percent of Disposable Personal Income” (NIPA Table 2.1), Bureau of Labor Statistics, U.S. Department of Labor, research.stlouisfed.org., accessed November 2009.

Conference Board (2009). Consumer Confidence Survey Press Releases, conference-board.org/economics/ConsumerConfidence.cfm, October 31, 2009.

Leonhardt, David (2009). “Broader Measure of U.S. Unemployment Stands at 17.5%,” New York Times, November 6, 2009.

de la Merced, Michael (2009). “Citigroup and BofA Profits Aided by Asset Sales,” New York Times, July 17, 2009.

Norris, Floyd (2009). “Job Losses Mount, Enduring and Deep,” New York Times, November 13, 2009.

Rampell, Catherine (2009). “Double-Dippers: Predicting a W-Shaped Recovery,”                            nytimes.com Economix blog, August 24, 2009.

Rampell, Catherine (2009a). “Comparing This Recession to Previous Ones: Job Losses,” nytimes.com Economix blog, November 6, 2009.

Streitfeld, David (2009). “U.S. Mortgage Delinquencies Reach a Record High,” New York Times, November 19, 2009.

Sider, Alison (2009). “Roubini Sees Risk of ‘Double Dip’ Global Recession,” Bloomberg.com, July 23, 2009.

Sider, Alison (2009a). “Jobless Rates Up in 29 States, Hitting Records in 4 of Them,” Bloomberg News, November 20, 2009.

Wind, Serge (2008). “Mortgage Crisis: Tipping Points and Trends underlying the Housing Boom and its subsequent Bust,” PowerPoint presentation, updated September 29, 2009.

Wind, Serge (2009). “Perspective on 2000’s Illiquidity and Capital Crisis: Past Banking Crises and their Relevance to today’s Credit Crisis,” unpublished paper, September 29, 2009.