Will Unemployment Prevent Recovery From the Recession?

One question I get in my speeches goes like this:

Won't our high unemployment rate prevent an end to the recession?  After all, people out of work don't spend much money.

Think about this a moment.  How did we ever get out of the recession of the early 1980s, when unemployment rose well above 10 percent?

Or how did we get out of the mid-1970s recession, when unemployment rose to nine percent?  In a few years it had fallen beneath six percent.  How did that happen?

It turns out that the economy has some self-correcting features in it.  Also, policy may help extract us from recession.  The self-correcting features include--believe it or not--consumer spending.  The drop in consumer spending has been disproportionate to the decline in incomes.  That is, most of the drop was due to employed people who were scared, rather than unemployed people.  When the employed people realize that they have dodged the bullet, they start spending.  So the key factor isn't so much the behavior of people out of work, but the behavior of those who still have their jobs.

Inventories also help correct the economy.  Businesses have cut back on their inventories, forcing producers to cut back on their output.  When businesses simply level out their spending, the economy will be relieved of a major negative.

One other self-equilibrating factor will not be at work this recovery.  In recessions, interest rates typically fall, stimulating new housing construction.  However, our excess housing inventory will prevent that from working this time round.

One last comment on unemployment:  look carefully at the historic pattern and you'll see that the unemployment rate is a lagging indicator, meaning that it starts to improve after the overall economy is already improving.  As such, it does not prevent the economy from improving.

If high unemployment prevented a recovery from recession, then we never would have recovered from our first recession.  But we've recovered from it, and from every other recession.

There are plenty of things to worry about.  The high unemployment rate preventing a recovery is not one of those things.

Comments

[Robert Armstrong]

It took a while to grasp your thinking and you are correct sir. As long as unemployment stays high or is on the increase we do not have a legit recovery. Lack of jobs wont stop a recovery because jobs are a bi-product of the recovery. We better gear up for retraining and retraining again as long as coporate america keeps off-shoring whole industry sectors, which will surely occur as we cozy up to China and a huge low cost labor pool.