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Weekly Economic Commentary

 
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Is the Current Pace of Decline in the Jobless Rate Different?

March 2, 2012

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The unemployment rate in January stood at 8.3%, down from a cycle high of 10.0% in October 2009. This is a span of 27 months, but a large part of the reduction of the jobless rate has occurred only in the past five months (see Chart 1). The elevated unemployment rate is a major source of concern for the Fed and features prominently in policy discussions. Against this backdrop, we have frequently received questions about the trend of the jobless rate in prior recoveries. Here is the historical research.

DEC 3 2 2012 Chart 1

Table 1 lists the time period of recessions, the cycle high of the jobless rate for each recession and the unemployment rate that prevailed 27 months after the peak was registered. During January 1960-January 2012, the median decline in the unemployment rate after 27 months following the cycle high is 1.7 percentage points. It appears to be a coincidence, that the jobless rate in the current recovery/expansion has dropped 1.7 percentage points and matches the historical median. The average decline of the jobless rate in 27 months following the peak works out to be 1.9 percentage points.

DEC 3 2 2012 Table 1

The economic reason for the slow decline in the jobless rate is the muted pace of economic activity this time around. Real GDP has risen only 6.2% after ten quarters of economic recovery compared with an average real GDP increase of roughly 12.5% in economic recoveries of a similar duration in the post-1960 period.

Watch MFI Lending to Track if the ECB’s Liquidity Shot is Successful

The European Central Bank (ECB) has extended massive liquidity shots in two doses, €489 billion and €530 billion in December 2011 and February 2012, respectively, to prop-up the banking sector. The monetary accommodation goes under the name of longer term refinancing operation (LTRO) and these are three-year loans at a low interest rate of 1.0%. The ECB has indicated that this extraordinary support will not be repeated again . Essentially, the ECB has bought time for banks to clean-up their balance sheets and respective national governments to put in place much needed structural reforms.

The LTRO will be successful if it translates to an increase in bank lending in the months ahead. Monetary Financial Institution (MFI) lending in the eurozone has slowed noticeably since early 2011 and increased an abysmal 0.6% during the twelve months ended January compared with a 4.4% increase in January 2011(see Chart 1). On month-to-month basis, MFI lending has risen 0.2% in January 2012, after three monthly declines. Now, you know one of the indicators we will be tracking closely in the near term.

DEC 3 2 2012 Chart 2

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The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.
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