Unemployment is a lagging indicator. Historically, it has continued to rise straight through to the end of recessions. The "jobless recoveries" from the 1990 and 2001 recessions were even worse: unemployment continued to rise for over a year after both recessions ended!
There is an ongoing debate as to whether the economy as a whole may begin to improve later in this year. Whether or not that occurs, the malaise of working and middle class America will not be relieved until wages increase, and employment rates return to a robust level.
If the "jobless recovery" pattern is again true for any recovery from this recession, the forecast for the economic well-being of average American families is grim indeed. That in turn will have a profound influence on the 2010 midterm elections, and may still play a role in 2012.
(A version of this diary is crossposted at The Economic Populist)
Both the 1990-91 and 2001 recessions were followed by lengthy "jobless recoveries" during which unemployment continued to rise.
The 1990-91 recession ended in March 1991 with an unemployment rate of 6.8%. Unemployment continued to rise for 15 months (till June 1992) to 7.8%. It took another 14 months for it to decline back to 6.8%.
The "jobless recovery" following 2001 was even worse. From the November 2001 rate of 5.5%, unemployment continued to rise for 19 months (to June 2003) to 6.3%. It then took another 13 months (till July 2004) for it to decline back to 5.5%.
The average for both recoveries is a 17 month increase of .9% (or a 15% percent increase in the rate) followed by 13.5 months decrease back to the starting number.
What will the rate of unemployment look like if the pattern of the last two "jobless recoveries" is followed again?
Let's begin with the observation that it has often been noted that this economic downturn has much in common with the Great Depression. Despite that, very few statistical series cover that period of time. So, earlier this year, in a series of 5 posts at The Economic Populist, I examined "Economic Indicators during the Roaring Twenties and Great Depression" in detail. I concluded by detailing two possible scenarios for 2009 based on those indicators -- an optimistic one and a pessimistic one.
For purposes of this discussion, I am going to assume that the optimistic scenario turns out to be the correct one: viz., that the YoY inflation rate will bottom in about July 2009 and that will mark the end of the recession and the beginning point of any recovery.
Applying these averages to our present scenario, in which unemployment has been rising at .4% a month for the last 4 months, we have 4 more months of rising rates to a 10.1% unemployment rate in July 2009 when the recession ends under the "optimistic scenario."
But here's the scary part: even under the optimistic scenario, if unemployment follows the same pattern as in the last two recoveries, here is what its graph will look like for the next 3 years!
Unemployment rises to 11.3% by December 2010, and then takes until early 2012 just to decrease back to 10.1%.
Note this is U3 unemployment, so U6 unemployment will be correspondingly worse.
It is safe to say that there will be major social and political consequences from an unemployment rate over 10% for 2 1/2 or more years -- and that's the optimistic scenario.
In 1930, faced with an unfolding disaster, the GOP was thrown out of Congresional majorities for a generation. They continued to lose seats in 1932, 1934, and 1936. But in 1938, with the Roosevelt Recession at its apogee, the GOP came roaring back, taking 81 seats in the House as well as several seats in the Senate. The verdict at the time was that a coalition of reactionary Republicans and conservative Southern Democrats meant that the New Deal was dead. In 1940 FDR survived his closest election.
Similarly, in 1992 the incumbent GOP lost the Presidency, while the majority Democrats lost seats in the House and tread water in the Senate.
Admittedly the pattern does not hold for 2002. The GOP, which was already in control of both the House and the Presidency, expanded its House margin, and picked up control of the Senate. We all recall, however, that 2002 was when the "War on Terror" was at its most potent level, including the use of the upcoming War in Iraq as a cudgel by Rove and the GOP against Democrats.
In 2010, the GOP will run on its resolute opposition to the Wall Street bailout. If Main Street unemployment is at its worst just at the eve of that election, I anticipate that Democrats will be held accountable.
In the graph above, I suggest that (barring yet another recession) unemployment will still just be receding below the 10% level in 2012. It is way too speculative to know how voters will treat this, but all other things being equal, I suspect that it will be a significant negative for Obama.
Back in the Great Depression, the Democratic party focused on immediate Relief, regulatory and labor Reform, and labor-heavy infrastructure work to aid in Recovery. We are only just beginning to see the influx of the massive Stimulus package that the Congress passed several months ago. If I am right about unemployment -- and remember, this is under the optimistic scenario -- then Democrats must redouble their efforts to aid Main Street America through a difficult time.