What a Lagging Indicator Looks Like
The unemployment rate, as you’ve probably heard, is a lagging indicator. But there are lags and then there are lags. One of the most worrying things about the current economic situation is that in recent recession the lag has been loooooong. Take this chart from Brad DeLong about the last recession:
Brad says, “A recovery in which unemployment is higher two years later than when the recovery began is not much of a recovery. And I don’t see what is going to keep the probability of such an eventuality low.”
I think the theoretical issue here is that as time passes, and growth happens, and technology progresses the labor market gets more advanced and more specialized. In general, this is a sign of good things happening. But the more advanced and specialized the economy becomes, the more difficult it is to make structural adjustments quickly. And when pulling out of a big recession, that’s a big problem.
24 Responses to “What a Lagging Indicator Looks Like”
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July 9th, 2009 at 12:21 pm
From http://news.yahoo.com/s/politico/20090709/pl_politico/24717
“In a potentially alarming trend for the White House, independent voters are deserting President Barack Obama nationally and especially in key swing states, recent polls suggest.
Obama’s job approval rating hit a — still healthy — low of 56 percent in the Gallup Poll on Wednesday. And pollsters are debating whether Obama’s expansive and expensive policy proposals or the ground-level realities of a still-faltering economy are driving the falling numbers.
But a source of the shift appears to be independent voters, who seem to be responding to Republican complaints of excessive spending and government control.
“This is a huge sea change that is playing itself out in American politics,” said Democratic pollster Doug Schoen. “Independents who had become effectively operational Democrats in 2006 and 2008 are now up for grabs and are trending Republican.
“They’re saying, ‘Costing too much, no results, see the downside, not sure of the upside,’” he said.
The White House denies there’s been any real shift. ”
————-
I fucking told you so.
July 9th, 2009 at 12:22 pm
Picking the 2001 recession as a representative example is a little unfair. It was called the “jobless recovery” for a reason.
July 9th, 2009 at 12:28 pm
If the unemployment rate is over 10% in Nov 2010 the democrates will lose more then 35 seats in the house.
July 9th, 2009 at 12:35 pm
There should be somebody (Krugman, Stiglitz, Galbraith?) doing an article on just why it is that GDP is the prime economic indicator versus un/employment.
The first economic goal of a society should be to protect the welfare of all citizens and employment is a much better measure of that than GDP.
GDP growth can be very demographically concentrated, as in the last 8 years. And it can also be fictitious, as was the asset inflation of the last 8 years.
GDP growth is useful as an indicator, but maybe employment should be the measure used to determine when recessions occur.
July 9th, 2009 at 12:36 pm
yes, but walker, this one’s going to be a “jobless recovery” too, so it’s a perfect comparison.
the problem is, once jobs are cut, they are very hard to restore: people get used to working with fewer colleagues, and management gets used to lower fixed costs.
July 9th, 2009 at 12:44 pm
This shows unemployment going from a low of roughly 4.25% to a high of 6.25%, and then dropping down to 5.75%. I don’t know, I’m hesitant about drawing any grand conclusions about the capacity of our economy to reabsorb jobs once GDP growth resumes from such relatively small numbers.
July 9th, 2009 at 12:46 pm
I recall a study from 2001-ish that showed the ratio of structural to cyclical unemployment has increased by roughly a factor of two in each downturn since WWII.
July 9th, 2009 at 12:53 pm
“But the more advanced and specialized the economy becomes, the more difficult it is to make structural adjustments quickly. And when pulling out of a big recession, that’s a big problem.”
And it’s an even bigger problem when the assholes in D.C. spend $ billions bailing out economic failures – a great way to dick over the economy’s ability to make the needed adjustments.
July 9th, 2009 at 12:54 pm
Folks – the difference between past recessions and the recessions of 1991 and 2001 is that for the first time, we have decoupled producers from consumers.
Think of it this way – in the past, recessions would be fixed through monetary policy, whereby any stimulus directly impacted American workers. But by shipping so many jobs overseas, in many cases, any increased demand will cause production to increase overseas, not in the United States….and this means that jobs do not come back.
July 9th, 2009 at 12:59 pm
JM:
I am not sure if your stats are correct or not. But this makes sense when you think of the types of jobs which are being shipped overseas. In many cases, the first products where demand increases when the economy recovers are lower value consumables (non-durable goods, clothes etc…). Things which need replacing every few years because they do not last long.
Now where are those jobs? Anyone?
So what we are left with are jobs that are much, much higher up the value food chain. This is good for those with those jobs, but the demand for these goods/services typically do not come back quickly. So in essence, the problem with fiscal stimulus and government spending which is not at all times trying to “Buy American” is that much of that stimulus actually helps foreign workers who produce the goods which will first see the demand rise when the economy starts to turn around.
July 9th, 2009 at 1:02 pm
I agree with Brad at 9. And it is not just now — when George W Bush stole $3 TRILLION out of our Social Security accounts in order to –among other things — give a $2 TRILLION tax cut to the richest 2 percent of the population, it did NOT stimulate much job growth.
Because the rich cocksuckers used the money to invest in CHINA. Compare the US foreign direct investment increase in 2001-2004 with the increased business investment in the USA itself.
Yet Democratic Senators John Beaurex, Mary Landrieu and Zell Miller didn’t point out this problem, for some reason.
Come to think of it, I don’t recall any other Democratic Senators saying anything either.
July 9th, 2009 at 1:11 pm
Tax cuts are the answer.
Now what was the question?
July 9th, 2009 at 1:15 pm
This seems like more of a reversion to the natural rate of employment than a lingering effect of the 2001 recession.
July 9th, 2009 at 1:21 pm
Brad: The trade deficit is only like 4% of the value of the GDP. The overall impact on jobs might be worse than that, but ultimately the relationship between domestic production and domestic spending is still pretty tight.
July 9th, 2009 at 1:22 pm
Not to get all philosophical on the philosophy major here, but “lagging indicator” represents exactly the wrong attitude about employment. Full employment should be approximately goals 1 through 4 of any sensible fiscal policy and those other numbers should be considered important only insofar as they reflect on the employment picture.
July 9th, 2009 at 1:40 pm
“But the more advanced and specialized the economy becomes, the more difficult it is to make structural adjustments quickly. And when pulling out of a big recession, that’s a big problem.”
See: Tainter, Joseph: “The Collapse of Complex Societies.” Super advanced and specialized economies are in deep trouble when rebuilding transportation and energy infrastructure is seen as major investment.
July 9th, 2009 at 1:46 pm
It should be noted that employment, as opposed to the unemployment rate, often tends to trough not long after the general economy troughs (aka, when the NBER calls an end to the recession). When you think about it, this pretty much has to be the case: unless labor productivity is growing at an unusual rate, you can’t have a sustained general economic recovery without an employment recovery too.
The chief reason that the unemployment rate then peaks so much later is that the growing population and increased labor force participation (in response to improving conditions) means the denominator (people seeking jobs) stays ahead of the numerator (jobs filled) for a while. And so the length of this lag ends up being dependent on how quickly employment is growing in comparison to population growth and increasing labor force participation. In turn, this means a slower general economic recovery generally means a longer lag before the unemployment rate peaks.
So, that is the most important question when it comes to predicting the relative timing of the unemployment peak: how quick of a general economic recovery are we going to get (once it actually arrives)? Unfortunately, a fast recovery is not particularly likely, and a really slow recovery is not implausible, but we shall see.
July 9th, 2009 at 1:58 pm
How do the bailouts hurt the economy’s ability to fix itself?
The bailouts certainly have not left a worker shortage; we have plenty of unemployed. They haven’t soaked up all available capital. The bank bailout did just the opposite.
So please explain exactly haow the bailouts are deterring new growth.
July 9th, 2009 at 2:09 pm
Recovery in jobs will be retarded until fear of disastrous liability for healthcare costs on the part of individuals and employers is removed from the national equation, and until healthcare providers can massively reduce their worthless administrative costs by knowing at the outset that they will be paid for their services and by whom. Until we achieve a decent healthcare plan successfully divorcing at minimum catastrophic health insurance from retention of a job, confidence in the economic future, the sine qua non of a thriving economy, will keep hitting an unsatisfactory ceiling as it did during the anemic Bush “recovery.” This is the single most important point, the macro of macro effects, and even though virtually all Americans will get it once these simple dots are connected, Obama is failing to say it. I’m not sure he or his people get it, or even Bernie Sanders or the most progressive of the rest of Congress. This is not just about the unfairness of people being uninsured, but is fundamentally about removing the fear of potential disaster that haunts everyone, even those with an occupation that provides five-star insurance today.
July 9th, 2009 at 2:30 pm
Wait a second–I thought that, in Brad’s view–the way to make the probability of that eventuality low was to elect Obama. Is he now saying that the jobless recovery he complained about in 2003 wasn’t Bush’s fault? Can’t be. Maybe the next jobless recovery will also be Bush’s fault, and then DeLong can claim some kind of moronic consistency.
July 9th, 2009 at 2:49 pm
Thomas, it would be nice if you knew what you were talking about. delong is talking about the precise same thing now and then: he believes in efficacious, sufficiently strong stimulus to create jobs in periods of negative or weak growth.
he thought the bush tax cut approach was not efficacious, and he was right, as the bush tax cuts didn’t come close to creating the number of jobs promised by the bush administration.
and he feared that the obama stimulus was too little.
so what’s your problem? that he said i have a choice between an intelligent self-controlled centrist and a crazed impulsive right-winger for president and i think the economy and everything else will be better served by the intelligent self-controlled centrist?
July 9th, 2009 at 4:42 pm
Whenever I lift my ostrich brain out of the dirt and I take a look around, I see the same thing. The Unemployment Monster, relentlessly and remorselessly gobbling up the country.
Frightened, I stick my head back down into the hole I have dug with my beak and hope, in fervent ostrich fashion, that the Unemployment Monster goes away.
July 9th, 2009 at 6:24 pm
This is nice and all, but what do you think the chart will look like in 2012? Do you really think unemployment will be above 6% by then?
July 9th, 2009 at 9:06 pm
Unemployment is a fabulous coincident stock market indicator. The best there is perhaps. Don’t mistake a slowing rate of decline for a plus. Don’t expect a plus any time soon either.
Eventually the employment indicator will have to break down. Once we get our minds around a relentlessly shrinking middle class and get more comfortable with the fact that corporations have no nationality. Those have been the messages for 30 years but we tried to borrow our way out of it.
US GDP growth is bound to happen someday. It is a distinct probability that growth will be higher in other areas of the world however. The developing world to be exact.
Why invest in America is the question the rest of the world asks now?It’s pretty obvious that our political system has raised mismanagement into a high art. The economic crisis is at root a political crisis. For economics is only another name for politics. The Libertarians and their free market fellow travelers have had it exactly 180 degrees wrong.