According to the National Bureau of Economic Research, the U.S. economy was in recession from March 2001 to November 2001. The economy eventually recovered from that downturn, but jobs were slow to be created in that recovery.
In fact, it took until June 2003 before the number of employed people in the civilian labor force equaled the number seen at the start of that recession. June 2003 — or 19 months after the 2001 recession was deemed to be officially over — was also the month the unemployment rate peaked at 6.3%.
These statistics play a large role in why the period after the end of the 2001 recession is commonly referred to as a jobless recovery.
There are any number of reasons why businesses were slow to hire back then.
Many businesses were still dealing with capacity excesses related to the technology bubble; others realized technological advances enabled them to produce more with less labor; and still others saw the benefits of outsourcing production to cheaper labor forces overseas.
The jobless recovery was a striking development, although its economic impact was muted to a large extent by the Fed’s easy money policies that led to a credit boom.
Today we are dealing with the bust of that boom and, arguably, we are entering another jobless recovery that will be more protracted than the last one and more impactful from an economic standpoint.
What Paul Harvey Said
The unemployment rate jumped to 10.2% in October. That is the highest rate of unemployment since April 1983, yet it only tells one part of a sad labor market story.
With apologies to the deceased Paul Harvey, “the rest of the story” is told in the accompanying tables of the employment report compiled by the Bureau of Labor Statistics (“BLS”).
We will not — and cannot — delve into them all here, yet the underlying message in perusing the tables is that the seeds of a jobless recovery on the other side of the Great Recession have been firmly planted.
Getting By with Less
The average workweek is a lowly 33.0 hours, which is the lowest on record dating back to 1964.
The downtrend in the average workweek since 1964 is unmistakable, and although we have seen plenty of job growth in intervening periods, the depressed levels today speak to the benefits of increased productivity driven by technological advances. The drop in aggregate demand is another factor too for the recent downturn.
Companies are getting by with less.
Since the nature of the current recession is so much different from recent recessions, we suspect companies will be guided by that philosophy as they attempt to right-size their operations for a period of lower aggregate demand that is the byproduct of a deleveraging process that has been forced on consumers by the collapse of the housing and stock markets, as well as a weak labor market.
The “Real” Unemployment Rate
The slowness with which companies are hiring is readily apparent in Table A-9 of the employment report. It is shown there that 35.6% of the civilian labor force who is officially counted as being unemployed has been out of work for 27 weeks or longer.
That is the highest on record and is well above the peaks that have been seen for this series in every recession since World War II.
Additionally, the alternative measures of labor underutilization found in Table A-12 reveal a troublesome picture for the economy, with the U-6 index indicating 17.5% of the civilian labor force plus marginally attached workers is either unemployed or underemployed.
In the household survey that produces the headline unemployment rate, the BLS does not count marginally attached workers (those who wanted and were available for work, and had looked for a job sometime in the prior 12 months) in the unemployment tabulation. The BLS exclusion is based on the fact that these workers had not searched for work in the four weeks preceding the survey.
Fortunately, the BLS is kind enough to provide the alternative measure in the U-6 index that has surreptitiously been referred to as the “real” unemployment rate.
Call it what you will. It is not encouraging that 1 out of every 6 workers is essentially unemployed or underemployed, which is the highest rate on record going back to 1994.
The “real” unemployment rate is clearly at a much higher starting point, too, than what was seen ahead of the jobless recovery coming out of the 2001 recession.
A Degree of Separation
The complexion of the labor market downturn that has coincided with this recession is also unique.
It is not just a blue-collar recession or a white-collar recession. It is a recession that has been indiscriminating in its reach and remarkable for the speed in which it has led to job losses.
Since the start of the recession in December 2007, the BLS indicates the number of unemployed persons has risen by 8.2 million. Twenty-two months after the start of the recession in 2001, the number of employed workers in the civilian labor force had dropped by 2.1 million.
The job losses in this recession have been pronounced at virtually all levels and in virtually most areas. Striking to us, though, is that the job losses run higher up the educational curve this time.
The unemployment rate for workers with a bachelor’s degree, or higher, and who are over 25 years old, is at its highest point since records started being kept in 1992. Granted this unemployment rate is “only” 4.7%, but that is still nearly 50% higher than the peak rate for this group during the jobless recovery from the 2001 recession.
College graduates typically hold higher-paying jobs, and to the extent that these workers are confronted with permanent job losses, the greater the risk they face of being unemployed or underemployed for an extended period.
To be sure, with the restructuring of the auto sector, the financial sector, and the over-stored retail sector to name a few industries, there will be permanent job losses with this recession.
This will be influential in shaping the jobless recovery because higher-paying management and professional positions will not be easy to come by as organizations downsize and more qualified applicants compete for fewer jobs.
Setting aside the education factor, the weak labor market certainly is not discriminating by age either. The accompanying chart shows high unemployment rates for age groups 35 and older.
The teenage unemployment rate is even worse. It currently stands at 27.6%, which is the highest on record dating back to 1948. The highest the teenage unemployment rate ever got in the early 1980s was 24.0% and the highest it ever got following the 2001 recession was 19.0%.
Teenagers are an important spending demographic, yet their influence pales in comparison to the influence of workers age 35 and older, many of whom are a primary cash source for teenagers.
More importantly, workers age 35 and older are the major spending engine for the U.S. economy.
The elevated rates of unemployment for this demographic, which are much higher than what was seen after the 2001 recession, should evoke plenty of concern about consumer spending activity, the timely repayment of debt obligations, and mortgage servicing capabilities in coming months.
An OMB Stretch
It is our belief that the unemployment rate will remain at an unnervingly high level for a lot longer than any politician would hope.
This is an important consideration that could hold important ramifications in the 2010 midterm election. Furthermore, it is apt to hold important ramifications for the federal budget.
The Office of Management and Budget in its mid-session review in August forecasted an average unemployment rate of 9.8% for calendar 2010 and an average unemployment rate of 8.6% for calendar 2011.
In the mid-session review the OMB also revised its outlook for the average unemployment rate for calendar 2009, raising its estimate to 9.3% from 8.1%. Through October the average unemployment rate for calendar 2009 is 9.1%.
Following the 2001 recession, which was much less severe than the current recession, the unemployment rate averaged 5.8% in 2002 (versus 4.7% in 2001) and 6.0% in 2003.
In other words, the average trended higher for two calendar years after the end of the 2001 recession, whereas, the current OMB forecast anticipates a lower average unemployment rate in 2011 than in 2010.
If the experience of the last jobless recovery is any guide, the OMB forecast would still have to be labeled a stretch at this point.
What It All Means
For a number of the employment statistics mentioned here, records only go back to the early 1990s. Even so, it is clear in almost every instance that the measures of unemployment today are worse than they were at any point following the jobless recovery of 2001.
It took 19 months after the end of the recession in November 2001 for the total number of civilian workers employed to get back to the level seen at the beginning of the recession in March 2001. The salient point here is that the jobs did come back, which is a testament to the remarkable manner in which our economy stokes innovation and new job creation.
Many of the concerns heard today are not that dissimilar to the concerns heard in the early 1980s when the unemployment rate reached as high as 10.8%.
The early 1980s, of course, brought the great age of consumption as baby boomers were only just starting to enter their prime earning and spending years. Notably, household debt as a percentage of personal income has jumped from 56.1% at the end of 1981 to 114.4% today.
We will not see the same spending boom or credit expansion that occurred back then, because we are in a period now of adjusting for those excesses that were roughly 25 years in the making.
What we should see is another period of slow job creation.
With the unemployment rate at 10.2%, the stock market might take some comfort in the thought that we are closer to the peak in the unemployment than the trough. Unfortunately, we are likely a lot closer to the beginning of a long, jobless recovery than the end.
If 200,000 jobs could be added monthly to nonfarm payrolls starting in November (and that will not happen in November), we would recover all of the jobs lost so far in the Great Recession sometime around April 2013.
By Patrick J. O’Hare – Briefing.com
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