A Historical Analysis of the Unemployment Rate

Written as of data available on July 26th, 2024.

The latest unemployment figures have set off alarm bells among economists and market watchers. For the first time in over seven decades, we're witnessing a phenomenon that has historically heralded economic downturns. Let's dive into the numbers and what they might mean for the future of our economy.

A Historical Red Flag

Since 1949, every instance of an 11 percent or greater year-over-year increase in unemployment has coincided with a recession. Fast forward to June 2024, and we're looking at a staggering 13.9 percent year-over-year rise. This statistic alone is enough to make economists sit up and take notice.

Why Unemployment Matters

The unemployment rate isn't just a number – it's a key indicator of our economic health. It represents the percentage of people in the labor force who are jobless but actively seeking work. When this number goes up, it often signals trouble ahead. A rising unemployment rate typically precedes economic contractions, while a falling rate usually indicates expansion.

High unemployment rates have a domino effect on the economy. As more people lose jobs, consumer spending tends to decrease. This, in turn, can lead to lower business revenues and potentially trigger an economic contraction.

A Closer Look at the Data

Our analysis reveals that out of 12 recessionary periods shown in the historical chart, every single one coincided with a year-over-year rise in unemployment exceeding 11 percent. The current 13.9 percent increase puts us firmly in this danger zone.

Is This Time Different?

Some argue that the recent unemployment spike might not be as concerning as it appears. The main counterargument centers on the fact that we're starting from a historically low unemployment rate. Let's examine this perspective:

The average unemployment rate trough (lowest point) before past recessions was 4.3 percent. Our current trough sits at 3.4 percent, well below this historical average. This lower starting point could potentially amplify the year-over-year change without necessarily indicating the same level of economic distress.

For context, a rise from 3.0 percent to 4.5 percent unemployment represents a 50 percent year-over-year change, while an increase from 5.0 percent to 6.5 percent is only a 30 percent change. This mathematical quirk could be making our current situation appear more dire than it actually is.

However, it's worth noting that there have been four instances in the past where the unemployment trough was close to or below our current level, and recessions still followed. These occurred in 1948, 1953, 1969, and 2020.

Looking Ahead

The coming months will be crucial in determining whether this time truly is different. The unemployment data released in the near future will provide valuable insights into the trajectory of our economy. Moreover, these figures will likely play a significant role in shaping the Federal Reserve's decision-making as we approach the end of the year.

While history suggests caution, only time will tell if this unemployment surge is indeed the harbinger of an economic storm or merely a statistical anomaly. As always, vigilance and careful analysis of multiple economic indicators will be key to navigating the uncertain waters ahead.