The stock market has collapsed, down 38% from September 26, and down 52% from its high of October 11, 2007. This ranks as one of the worst markets in history. So you'd think that the economy would be absolutely miserable, right? But it's not, according to this chart. This plots the ratio of weekly unemployment claims to the total amount of people working. As of the end of October, this barely ranked as a modest recession. We're far lower today (actually about 50% lower) than the ratios which prevailed in most recessions in recent decades.It would seem from all the gyrations of late surrounding the question of whether or not Detroit will be bailed out, that the failure of GM and Ford would put a huge segment of the working population at risk. But that is an exaggeration. There are many ways a GM and Ford bankrutpcy could be resolved that wouldn't have a significant impact on the U.S. economy. Simply renegotiating existing labor contracts could save most of those jobs. But even if their plants close, the economy will continue to function. Other automakers would step in the to fill the gaps that GM and Ford might leave.
The panic reflected in the market these days is unwarranted.
I was wondering earlier today what a chart like this would look like ... we keep hearing that "jobless claims are the most since 1991" or "the most since 1982" or whatever, without correcting for the growth in the US labor force during the last quarter-century. I've enjoyed your blog a lot and I love the graphics you generate to support your arguments.
ReplyDeleteThanks!
ReplyDeleteIndeed, this is a terrific chart that I have wondered about. It seems the financial media, like most media, thrives on presenting the most schocking take on facts and figures while rarely putting them in context. If it bleeds, it leads is still alive and well in the information age.
ReplyDeleteI recall CNBC being described as bubble vision during the dot com boom, and it sure felt that way watching the parade of non-stop tech investing experts debating whether it was better to buy Cisco or Global Crossing, etc., all the way up to NASDAQ 5000. Now, CNBC is morphing into crisis vision with a parade of experts debating whether we are in for a long recession of another depression.
Even though jobless claims have not reached truly historic levels, as your chart shows, it seems higher unemployment is on the way. It seems to me the most important question about our future is how high will it go? Since we have the highest percent of service sector jobs in history, does that make unemployment levels more sensitive to the macroeconomic contraction or less? I'm not sure, but my gut tells me that employment levels will react faster than any time in history.
Another 30,000 feet view of things seems to be that real median income in 2007 is below the level in 2001 when the recession ended (according to the Census Bureau); yet, during that time housing and stocks had a huge boom. Since income did not go up, and I will add that inflation did not go down, that entire boom was the result of credit expansion. If credit had stayed proportional to incomes, that boom would not have happened at all. Now that it did happen, we have had 7 years of a huge misallocation of resources, and now we have to absorb that misallocation without another credit expansion, and perhaps even a credit contraction.
ReplyDeleteMark: I agree that the unemployment rate will likely move higher. I'm hoping it doesn't go dramatically higher. After all, we've had bad news making headlines for well over a year
ReplyDeleteI'm not sure I agree that the decline in median income was tied to credit. "Credit" is a slippery term to begin with, and it doesn't create or destroy growth necessarily, nor does an expansion of credit due to private sector activity necessarily lead to a rise in incomes.