Analysis: Good News On Jobs, But Will It Last?

Unemployment Line i i

Job seekers fill out applications for positions at a new bar and restaurant while standing in line in Detroit, Sept. 25, 2009. Paul Sancya/AP hide caption

itoggle caption Paul Sancya/AP
Unemployment Line

Job seekers fill out applications for positions at a new bar and restaurant while standing in line in Detroit, Sept. 25, 2009.

Paul Sancya/AP

Friday's news of a drop in the unemployment rate to 10 percent is a welcome development. It was presaged by earlier strength in reliable leading employment indicators, which suggest that this improving pattern will persist next year. In November, employers cut the fewest jobs since the recession began, but how should Americans interpret this information? With unemployment in double digits for the first time since 1983, many still worry about the jobless recovery.

The post-recession dip in joblessness is the good news. But, looking ahead to the later phase of the expansion, the post-World War II period shows disturbing cyclical patterns.

The jobless rate usually sees a sizable drop during the economic recovery — and bigger recessionary spikes in unemployment are typically followed by larger declines during the first year of improving unemployment. So it would be no surprise if, a year after the unemployment rate begins to drop, it falls to the 9 percent range.

Lakshman Achuthan

Lakshman Achuthan is managing director of the Economic Cycle Research Institute. He is a member of Time magazine's board of economists, and co-author of Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy. Kate Milford hide caption

itoggle caption Kate Milford

The real problem is that the rate of decline in joblessness slows during the rest of the economic expansion. The annual post-war pace of decline in unemployment during these periods has been reasonably uniform, the median being 0.5 percent a year.

If that pattern persists, the U.S. economy needs to keep expanding without interruption until 2020 for unemployment to fall to its pre-recession low of 4.4 percent. Should the next recession arrive earlier, as we suspect, it will take much longer. The implications constitute nothing short of a wake-up call for policy makers who promise to get job growth back on track.

Since World War II, there has been a clear easing pattern in the trend rate of economic growth during expansions, culminating in the 2001-07 expansion, which showed the slowest trend rate of growth on record — especially in terms of jobs. Ominously, during expansions following the initial year of revival, growth in nonmanufacturing employment has been falling in a parabolic fashion since the 1970s. A continuation of this pattern would lead a much worse job market than almost anyone expects.

Anirvan Banerji

Anirvan Banerji is the director of research for the Economic Cycle Research Institute and a RealMoney.com contributor. hide caption

itoggle caption

The "great moderation" of business cycles once extolled by many economists, including Federal Reserve Chairman Ben Bernanke, is history. The trend rate of growth is shriveling. In other words, business cycles are back with a vengeance.

The real risk is of more frequent recessions repeatedly aborting cyclical downswings in unemployment in coming years. Some consolation comes from the fact that past performance does not dictate destiny, and extrapolation from past patterns is not a reliable forecasting method, especially if the pattern is about to change.

It is at least conceivable that either enlightened policy measures, or good luck, or both, will result in a decisive break from these patterns. The silver lining is that even an economy dipping in and out of recessions and keeping joblessness cycling near historical highs is a navigable one for decision-makers who keep a closer watch for recessions and recoveries.

Lakshman Achuthan is managing director of the Economic Cycle Research Institute. He is a member of Time magazine's board of economists, and co-author of Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy. Anirvan Banerji is the director of research for the Economic Cycle Research Institute and a RealMoney.com contributor.

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