As often mentioned there is a tendency for the unemployment rate to peak just after a recession ends. In recent years the peak has been extended as we have experienced jobless recoveries.
The big question, of course, is how likely is that this time? We talked about structural changes – the shift from manufacturing to service. We’ve talked about monetary policy difference – the much more gradual monetary policy of the recent to recessions.
Another way to look at this is through the lens of consumer spending. Consumer spending leads changes is unemployment. The following is a chart of the 12 month change in consumer spending vs. the inverse 12 month change in the unemployment rate.
What this chart is telling us is that the changes in personal consumption expenditures (blue line and left axis) lead changes in unemployment (red line and right axis). When personal consumption expenditures slow down unemployment rises soon after. Remember the red line is the inverse of the change in unemployment. Zero means unemployment is constant at whatever level. Less than zero means unemployment is increasing.
Its interesting how tight the relationship is. We have some deviations during the 1970s. The first is in the 1969 recession which I don’t know enough about, the second is in the 73 recession and may be due to increases in oil prices that caused personal consumption expenditures to fall less than domestic personal consumption expenditures. We also have a deviation in the 2001 recession, largely because it was a business rather than consumer driven recession.
One other thing that the chart is telling us that consumption has to increase a roughly a 3.5% rate per year to keep unemployment constant. This has to give us pause about the future. Can we expect that level of increase in the post financial crisis era?
Ideally, we’d like to see investment or net exports take up the slack. However, as often mentioned we can’t expect to get much out of net exports when the rest of the world is doing worse and its hard to get investment moving along with as much excess capacity as we have now.
Sectoral shifts provide some possibility for increased investment even in a low capacity utilization environment. We shift out of cars and into iPhone, producing investment along the way. This, of course, seems like a long shot for closing the kind of gap that we have. More on this and the relation to stimulus later.