Matthew Yglesias

Apr 3rd, 2009 at 10:24 am

Labor Market Still Terrible, Likely to Get Worse

Via Ali Frick, a useful chart from Calculated Risk that helps put today’s terrible employment report in context:

Unfortunately, context only makes things look worse. Employment is what they call a “lagging indicator”—it picks up only after GDP growth is under way. And in the past two recessions it’s lagged especially severely with the peak of unemployment coming about 18 months after the resumption of growth.

Meanwhile, the most optimistic forecasts I’ve seen spy in the current data some signs of recovery. These optimistic forecasts envision further contraction in Q2 of 2009, but at a reduced pace, followed by growth in Q3 and Q4 as stimulus money begins to take effect and purchases of cars and durable goods start creeping up as things break and people need to replace them. That would be followed by some more robust growth in 2010 as confidence returns. That’s a rosy scenario, but it could happen. It’s important to note, however, that even if this rosy scenario takes place, we should still expect to see unemployment continue to rise for about 21 more months and it would take several years after that for the unemployment rate to actually drop to a full employment level. We could perhaps get triply rosy and say that a progressive administration will move more aggressively toward full employment meaning we might be only three and half years away rather than, say, five but that would (a) still be terrible and (b) actually be extremely optimistic on a variety of fronts.

An alternative, also plausible scenario, would be that with since the money supply has grown so rapidly to counteract the recession, that recovery will be unusually slow since every step of growth is going to need to be countered by monetary tightening.

Update It occurs to me to say that if I were in charge of the NBER, I would probably define recessions primarily in labor market terms rather than in GDP terms and we'd be rid of this "lagging indicator" business and get, I think, a better picture of the ebbs and flows of the business cycle.