U.S. Unemployment Rate Likely To Rise Into Next Year

On June 30, 2009, The Conference Board revealed that consumer confidence had fallen in June. Worries about the job market and business conditions were largely responsible for the decline.

In part, The Conference Board’s statement explained:

Says Lynn Franco, Director of The Conference Board Consumer Research Center: "After back-to-back months of strong gains, Consumer Confidence retreated in June. The decline in the Present Situation Index, caused by a less favorable assessment of business conditions and employment, continues to imply that economic conditions, while not as weak as earlier this year, are nonetheless weak..."

Consumers' appraisal of present-day conditions was less favorable in June. Those claiming business conditions are "good" decreased to 8.0 percent from 8.8 percent, while those saying conditions are "bad" increased to 45.6 percent from 44.5 percent. Consumers’ assessment of the labor market was also less favorable. Those stating jobs are "hard to get" increased to 44.8 percent from 43.9 percent. Those saying jobs are "plentiful" decreased to 4.5 percent from 5.8 percent.

Consumer worries about the unemployment rate raise the all-important question as to when the currently climbing level of unemployment will peak and then begin to recede. The historic experience suggests that the unemployment rate probably will not peak until next year.

The average duration of unemployment is a lagging indicator. Therefore, reversals in the unemployment rate usually commence some time after a business cycle has already peaked or troughed.

An examination of the ten post-World War II recessions reveals the following concerning the timing of the peak unemployment rate:

• At the end of the recession: 2
• 1 month after the end of the recession: 1
• 2 months after the end of the recession: 1
• 3 months after the end of the recession: 2
• 5 months after the end of the recession: 1
• 9 months after the end of the recession: 1
• 12 months or more after the end of the recession: 2

In the above sample 40% of the cases saw the unemployment rate peak 2 or fewer months after the end of the recession. 60% of the cases saw the unemployment rate peak 3 or more months after the end of the recession, and half of those cases experienced a peak unemployment rate 6 or more months after the end of the recession.

Combining the historic experience with the structural dynamics behind the recession suggests that the unemployment rate will probably peak well after the current recession comes to an end. Continuing financial system fragility, the ongoing credit crunch, deleveraging by households, and the cause of the recession (an asset bubble) indicate a delayed recovery in employment.

Three cases from the post-World War II experience are particularly relevant:

December 1969-November 1970 Recession:
• Underlying cause: A credit crunch that erupted in 1966
• Timing of the peak unemployment rate: 9 months after the recession ended

July 1990-March 1991 Recession:
• Underlying causes: Regional real estate bubble, S&L crisis
• Timing of the peak unemployment rate: 15 months after the recession ended

March 2001-November 2001 Recession:
• Underlying cause: Dot Com bubble burst
• Timing of the peak unemployment rate: 19 months after the recession ended

A delayed recovery in employment suggests a higher peak unemployment rate. In general, the longer it takes for the unemployment rate to peak, the greater the rise is from the unemployment rate that prevailed at the end of a recession.

On average, for every month it takes for the unemployment rate to peak, the unemployment rate rises nearly 0.8% from the unemployment rate at the time the recession ended. For example, if the unemployment rate was 6% at the end of a recession, and the unemployment rate continued to climb for 6 additional months, the data would imply a 6.3% peak rate of unemployment.

Therefore, were the unemployment rate to range from 9.5% to 10.0% at the time the present recession ends, and were the unemployment rate to continue to climb for 6-12 additional months, the peak unemployment rate could range from 9.9% (in the case of a 9.5% rate that peaks 6 months later) to 10.9% (in the case of a 10.0% rate that peaks 12 months later). In the case of a rate that peaks 18 months later, there would be an implied range of 10.8% to 11.4%.

All said, assuming the recession ends in the Third Quarter of 2009, it appears likely that the unemployment rate will not peak until some time next year. There is a possibility that it will not peak until some time in 2011. Finally, a 10% or above peak unemployment rate looks realistic at this time.

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