Vital Signs: Is Unemployment Near a Peak?

The headliner of this week’s economic news is the Labor Dept.’s employment report for March. The high level of weekly unemployment claims, which stood at 652,000 on Mar. 21, says the job market is still deteriorating. The employment report will tell us just how badly. The median expectation of economists surveyed by Action Economics is for payrolls to drop by about 650,000. That would be about the same amount as in February. In addition, given another sharp increase in the unemployment rate for insured workers, analysts look for the overall jobless rate to jump to 8.4%, from 8.1%.

The big question now is: How high will the unemployment rate go? It’s an important question for two reasons. First, economists say high and persistent slack in the labor markets in the range of 9% to 10% joblessness has the potential to fuel deflation. And second, the jobless rate continues to head toward the 10% level assumed to be a worst-case scenario in Washington’s stress tests for the nation’s banks. Unemployment has already hit 10% in California, Michigan, Rhode Island, and South Carolina.

The jump in joblessness over the past year is on a par with the fastest yearly increases since monthly data began in 1948, and the rise is far from over. The economy has to grow on the order of 2.5% over a sustained period just to create enough jobs to keep up with the increase in the labor force. That pace of economic growth is consistent with monthly payroll gains of about 100,000. These are the minimum conditions for simply stopping the increase in the unemployment rate and holding it steady. Considerably faster growth will be needed to bring the rate back down to the 5% level generally considered to be full employment.

Unemployment’s peak will depend mainly on the depth of the recession. Right now, the consensus forecast implies a peak-to-trough decline in real GDP of about 3.5%. Using a classic relationship between real GDP growth and changes in the jobless rate, economists at UBS estimate such a decline would yield a peak jobless rate in the neighborhood of 8.75%. The same analysis implies it would take a 6% total drop in real GDP to generate 10% unemployment.

The problem, however, is that when GDP growth turns positive, the recovery may not be strong enough to prevent the jobless rate from continuing to rise well into 2010. That GDP/unemployment relationship is based on historical patterns, and, in the past, deep recessions have typically been followed by strong recoveries. That’s not expected to be the case this time, because of the long healing time the banking system and the credit markets are likely to require.

Although it’s not much consolation, the March report on payrolls may hold hope that the worst of the job losses are behind us. The biggest monthly drop so far was 681,000 in December, followed by declines of 655,000 and 651,000 in January and February. In the four weeks through Mar. 21, weekly jobless claims appear to have stabilized, although at a very high level. Even so, it’s a long way between now and the economic conditions necessary to halt the rise in the unemployment rate.

Here’s the weekly economic calendar, from Action Economics:

Top Economic Reports
Reports Date Time For Median Estimate Last Period
Chicago PMI Tuesday, Mar. 31 9:45 a.m. March 34.9 34.2
Consumer Confidence Index Tuesday, Mar. 31 10:00 a.m. March 25.4 25.0
ISM Index, Manufacturing Wednesday, Apr. 1 10:00 a.m. March 36.0 35.8
Construction Spending Wednesday, Apr. 1 10:00 a.m. February -1.7% -3.3%
Domestic Auto Sales (Millions) Wednesday, Apr. 1 afternoon March 3.0 2.9
Domestic Light Truck Sales (Millions) Wednesday, Apr. 1 afternoon March 3.5 3.5
Factory Orders Thursday, Apr. 2 10:00 a.m. February -1.3% -1.9%
Nonfarm Payrolls (Thousands) Friday, Apr. 3 8:30 a.m. March -645 -651
Manufacturing Payrolls (Thousands) Friday, Apr. 3 8:30 a.m. March -160 -168
Unemployment Rate Friday, Apr. 3 8:30 a.m. March 8.4% 8.1%
Average Hourly Earnings Friday, Apr. 3 8:30 a.m. March 0.2% 0.2%
Average Weekly Hours Worked Friday, Apr. 3 8:30 a.m. March 33.3 33.3
ISM Index, Nonmanufacturing Friday, Apr. 3 10:00 a.m. March 42.0 41.6
Other Reports and Events
Reports/ Events Date Time For
Dallas Fed Survey Monday, Mar. 30 10:30 a.m. March
ICSC-UBS Store Sales Tuesday, Mar. 31 7:45 a.m. Mar. 22-28
Johnson Redbook Weekly Store Sales Tuesday, Mar. 31 8:55 a.m. Mar. 22-28
S&P Case Shiller Home Price Index Tuesday, Mar. 31 9:00 a.m. January
SPEECH: Minneapolis Fed President Stern Tuesday, Mar. 31 9:00 a.m.
SPEECH: Philadelphia Fed President Plosser Tuesday, Mar. 31 1:00 p.m.
EARNINGS: Apollo Group (APOL) Tuesday, Mar. 31  
EARNINGS: Lennar (LEN) Tuesday, Mar. 31  
Mortgage Applications Wednesday, Apr. 1 7:00 a.m. Mar. 22-28
ADP Employment Data Wednesday, Apr. 1 8:15 a.m. March
Pending Home Sales Wednesday, Apr. 1 10:00 a.m. February
Initial Unemployment Claims Thursday, Apr. 2 8:30 a.m. Mar. 22-28
EARNINGS: Micron Technology (MU) Thursday, Apr. 2  
EARNINGS: Monsanto (MON) Thursday, Apr. 2  
SPEECH: Fed Chairman Bernanke Friday, Apr. 3 12:00 p.m.
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