Weekly Unemployment Claims Fall and a Brief Look Ahead

Initial weekly unemployment claims fell more than expected to 550,000 for the week ended August 1, 2009. That is well below the 674,000 figure incurred during the week ended March 28, 2009.

To date, the 2007-present recession has seen the following with respect to initial weekly jobless claims:

• Peak initial weekly unemployment claims: 674,000
• Consecutive weeks with initial unemployment claims of 500,000 or more: 30
• Weeks with initial unemployment claims of 500,000 or more: 38
• Consecutive weeks with initial unemployment claims of 600,000 or more: 17
• Weeks with initial unemployment claims of 600,000 or more: 22

Despite the unexpectedly large decline in weekly jobless claims, initial weekly unemployment claims will likely remain at or above 500,000 for most of the rest of this year. If the past three recessions (1981-82, 1990-91, and 2001) are representative, there remains a distinct possibility that weekly unemployment claims could again approach or reach 600,000 at some point before the year is finished. Each of the past three recessions featured a brief period during which weekly unemployment claims rose before renewing a decline from their peak.



All said, looking back at the past, through the rest of the year one could see:

• A period during which weekly unemployment claims rise anew, perhaps approaching or reaching 600,000 during one or two weeks.
• A persistence of initial weekly unemployment claims remaining at or above 500,000, for most of the rest of this year, though some fluctuations below 500,000 are possible.
• A low possibility that weekly unemployment claims could fall to 450,000 toward the end of the year.
• A continuing rise in the national unemployment rate from 9.4% through the rest of this year, though minor fluctuations with some small dips are also possible ahead of the peak unemployment rate.

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Is the U.S. in the Midst of a “Lost Decade” for Stocks?

Typically, U.S. stocks bottom out 3-6 months before the end of a recession and they return to their pre-recession highs, on average, about 3.7 years after having reached that high. The experience following U.S. recessions since 1950 is as follows:

• July 1953-May 1954 recession: Pre-recession peak: 293.79, January 5, 1953; First close at or above that level: 294.03, February 4, 1954; Interval: 1 year, 30 days (395 days).

• August 1957-April 1958 recession: Pre-recession peak: 521.05, April 6, 1956; First close at or above that level: 523.40, September 15, 1958; Interval: 2 years, 5 months, 9 days (892 days).

• April 1960-February 1961 recession: Pre-recession peak: 685.47, January 5, 1960; First close at or above that level: 692.06, April 10, 1961; Interval: 1 year, 3 months, 5 days (461 days).

• December 1969-January 1970 recession: Pre-recession peak: 985.21, December 3, 1968; First close at or above that level: 988.26, November 9, 1972; Interval: 3 years, 11 months, 6 days (1,437 days).

• November 1973-March 1975 recession: Pre-recession peak: 1,051.70, January 11, 1973; First close at or above that level: 1,065.49, November 3, 1982; Interval: 9 years, 9 months, 23 days (3,583 days); Two oil price shocks, an extended period of high inflation, and two recessions (January-July 1980 and July 1981-November 1982) occurred during that nearly 10-year interval.

• July 1990-November 1991 recession: Pre-recession peak: 2,999.75, July 17, 1990; First close at or above that level: 3,004.46, April 17, 1991; Interval: 9 months (274 days).

• March 2001-November 2001 recession: Pre-recession peak: 11,722.98, January 14, 2000; First close at or above that level: 11,727.34, October 3, 2006; Interval: 6 years, 8 months, 19 days (2,454 days); The dot-com bubble burst, the federal government saw budget surpluses that emerged during the late 1990s give way to renewed significant budget deficits, and the September 11, 2001 terrorist attacks occurred during that nearly 7-year interval.

However, in the earlier experience, there have been two occasions during which the Dow Jones Industrials failed to reach its pre-recession peak for 10 years or longer. Those seminal economic events were the Panic of 1907 that produced a credit crunch and severe recession in which real GDP fell 10.8% and the Great Depression during which real GDP contracted by 26.5% in the 1929-33 timeframe. In addition, following the collapse of Japan’s twin stock market and real estate bubbles, its Nikkei 225 Index has remained much below its December 1989 top for more than 19 years.

The Panic of 1907: The Dow Jones Industrials closed at 103.00 on January 19, 1906. The Dow Jones Industrials did not return to that level until it closed at 103.11 on September 28, 1916, an interval of 10 years, 8 months, and 9 days (3,905 days).

The Great Depression: The Dow Jones Industrials closed at 381.17 on September 3, 1929. The Dow Jones Industrials did not return to that level until it closed at 382.74 on November 23, 1954, an interval of 25 years, 2 months, and 2 days (9,212 days).

Japan’s “Lost Decade” of the 1990s-2000s: The Nikkei 225 Index closed at 38,915.87 on December 29, 1989. Through July 10, 2009, the Nikkei has failed to return to that level. That is an interval of 19 years, 6 months, and 11 days (7,133 days). Its last closing price was 9,287.28 on July 10, a figure that is 76% below its December 1989 crest.

In terms of the ongoing “Great Recession” in the United States, the Dow Jones Industrials peaked at 14,164.53 on October 9, 2007. On July 9, the Dow Jones Industrials closed at 8,183.17, which is 42% below its pre-recession peak.

Four possible scenarios could result in the Dow Jones Industrials taking a decade or longer to return to its pre-recession peak:

• In the absence of visible signs of economic recovery, federal policy failures, and a generally unrelenting bear market that turns aside repeated rally attempts, investors could make fundamental changes in their perceptions of risk concerning equities. That development would lead to a long-term reduction in demand for stocks.

• The economic recovery from the current severe recession would be fairly brief. Perhaps, a double-dip recession scenario would unfold. At the same time, on account of a fragile financial system that takes time to heal and increased leverage that needs to be worked off by households, recessions could grow more frequent in succeeding years. During the pre-World War II era (1857 through 1945), the median duration of economic expansions was 22 months and the mean length was 29 months. During the post-World War II period, those figures more than doubled to 45 and 58 months respectively. There is no assurance that the post-World War II experience of notably longer business expansions will persist.

• The U.S. could still experience a systemic financial crisis that severely damages its financial institutions, the development and onset of deflation from a premature withdrawal of fiscal and monetary stimulus, or a currency crisis should it encounter difficulty raising funds to support its economic stimulus efforts and underwrite possible new programs.

• A major geopolitical shock or shocks that have a substantial adverse impact on the U.S. and international economies. Such shocks could include, but would not be limited to the outbreak of conflict in a geopolitically crucial part of the world, the collapse of a government and radical changes in policy in a nation whose economy is intensely interconnected with the world’s major economies, a catastrophic natural disaster that devastates a globally-important financial center.

Conclusion:
Given the past experience following the severe 1973-75 recession, the collapse of the dot-com bubble, there is a reasonably likely prospect that the Dow Jones Industrials may not return to its pre-recession high of 14,164.53 until late in 2014 or beyond. The effectiveness of ongoing political efforts to shore up the nation's banking system and revive the economy and whether or not there are additional significant economic and geopolitical shocks will be critical in influencing the timing of a stock market recovery. Should those efforts fail to produce the desired impact, or worse, should they result in consequences that adversely impact or disrupt the nation’s growth trajectory, there is a genuine possibility that the Dow might not return to that level for a decade or longer after its October 9, 2007 record close.

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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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