14 February 2011 – Chart of the Week
Chart of the Week: The US Unemployment Rate
On the heels of QE2 and another dose of fiscal stimulus, a number of economists have been engaged in a vigorous discussion about the right policy response to US labor market weakness. The debate centers on the structural and cyclical forces that might cause a high unemployment rate to persist. A decline in the unemployment rate could sideline the discussion, at least for now.
Supporters of the structural shift theory argue that jobs in some sectors of the economy, such as construction, will never return to prior boom-time levels and that it will be a lengthy process for other sectors to take up the slack, a reality which, in their view, fiscal and monetary policy can do little to alter. Detractors respond that the weakness in the labor market is predominantly cyclical and that the intensity of unemployment calls for an equally vigorous and ongoing policy response. As evidence, one notable advocate shows how the annual unemployment rate for all sectors doubled from 2007 through 2010 with very little variation, suggesting that the labor market weakness is economy-wide rather than embedded in a particular sector. However, straight-lining the annual data overstates the case.
The headline unemployment rate began from a low of 4.4% in May 2007, shot up 5.7 percentage points at the October 2009 peak (the dark red bar in the tornado chart), and has since dropped back 1.1 percentage points (the dark blue bar). At the sector level, the raw data is not seasonally adjusted, which complicates direct comparisons. The seasonals can be ironed out by using a twelve-month moving-average to identify the peak in unemployment for each sector and to measure the subsequent improvement.
After that bit of smoothing, the sectoral data offers some tantalizing if tentative conclusions. First, while it can be hard to see in some cases, the unemployment rate has peaked in all but one of the major sectors tracked by the government, that exception being “other services.” Secondly, the construction industry remains a major outlier with an unemployment rate surge that is still well in the teens despite recent hints of improvement in housing and commercial activity. Thirdly and perhaps most importantly, a nascent “v” in the rest of the data is showing the most improvement in the sectors that had the worst unemployment. Mining and manufacturing stand out as major sources both of job losses during the recession and job gains during the recovery, while the other sectors generally show increasingly less improvement.
As more data comes in to fill out the tornado chart, a possible synthesis may emerge in the economists’ debate. Demographic and other shifts in the economy could well be unfolding, including aging boomers. But those secular forces will take years to unfold and could be swamped over the next several quarters by an accelerating expansion. An armada of stronger data – from initial jobless claims to purchasing manager surveys to bank lending conditions – means that the unemployment rate can continue to fall for some time. After a vigorous cyclical recovery, the unemployment rate should eventually level out well above the lows of recent years as structural adjustments persist into future business cycles.
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