Unemployment during the Great Depression

Are we really going back to this?

I’ve seen a lot of commentary recently about how the current situation is so bad that we may be at the start of a depression rather than a recession. While we can’t predict the future, we can study the past. So, let’s take a look at unemployment during from the start of the Great Depression to the end of World War II:

One thing that is difficult to understand about the Great Depression is that, even far beyond its name, it was a seriously awful economic period unlike any recession we have seen since. A regular recession is like a walk in the park compared to a depression.

Even the Financial Crisis in 2007-2009 (aka the Great Recession) falls far short as a comparison. We really have nothing in our collective experience as a society to fully understand a depression - just a bunch upsetting anecdotes and a little bit data from people long gone.

I don’t say all this to downplay recessions. Losing jobs is terrible. But there is an objective difference between the 25% unemployment we see in the chart above and the 10% unemployment we have seen at worst in recessions since.

Now, with coronavirus threatening perhaps 20% unemployment due to the massive country-wide shut down, it does make sense that people are saying the virus outbreak could be the start of a depression when comparing the unemployment numbers. But, there is a big difference between a temporary spike in unemployment and sustaining that double digit unemployment over a decade like in the chart above!

The coronavirus is a terrible tragedy and will come at a great cost. Let’s just take a step back before we fan the flames by proclaiming a new Great Depression as well. Nothing is impossible but let’s not jump the gun and worry about something that is still unlikely. We have more than enough to worry about from a human perspective.

The Unemployment Rate

It's going up

The unemployment rate is arguably one of the most closely watched metrics out there. So, it’s about time we finally gave it a look:

The first thing that is immediately obvious to me when looking at this chart is the direct relationship between the unemployment rate and recessions. In every single recession, the unemployment rate went up.

And, if we look at the right of the chart and assess the latest data just released, what do we see? The beginning of a spike up. This is why everyone is saying we are already in a recession.

Although the economists at the NBER haven’t officially announced anything yet and may not for some time, it is obvious to almost anyone who takes a moment to look around that we have entered a recession. Economic data is slow to reflect the speed of the outbreak’s impact.

As for how long that recession will be, that is difficult to predict. Based on the history seen in the chart, we can see that recessions basically end once the unemployment rate starts falling.

Unfortunately, just because a recession is technically over doesn’t mean times aren’t difficult. It will take awhile for the unemployment rate to fall to pre-recession levels. We have a tough road ahead of us but, just like they always have, things will recover and a new expansion will begin!

Ugh, the jobless claims chart is now even MORE broken

Numbers were even worse than expected

A week ago, I wrote that coronavirus broke the jobless claims chart when initial claims came in at 3,283,000. That initial estimate was just adjusted upward by 24,000 to 3,307,000. In normal times, an adjustment of 24,000 would be concerning news. But, these are not normal times:

That’s not a typo - jobless claims came in at 6,648,00. Wow. That easily beat the general consensus pre-release estimate, which was around three million.

It also ruined the initial claims chart even more than before! At least in the last version there was still a little bit of relationship to see between business cycles and claims. Now, it looks almost like a straight line.

Prior to the coronavirus, the historical record was 695,000 claims. This means that last week’s release beat that record by almost five fold. And now, this week is almost ten times as bad as the historical record. Think about how bad recessions are and think about ten times that. Scary stuff.

The hope is that this recession will be quick and therefore, while sharp, will be more of a shock and then quickly taper off. Every day the outbreak continues reduces the chances of that happening. We can all do our part to take care of the economy by taking care of our health. Save a life. Save a job. Stay home.

Nonfarm Private Payroll Employment

Basically, jobs

Jobs are vital to the general well-being of the overall economy and individual livelihoods. So, when people start losing jobs that’s really bad.

Fortunately, there are metrics to measure the extent to which jobs are being created or lost. One metric comes from ADP, which is the company responsible for processing payrolls for millions of Americans:

Now, there is an official jobs report that is produced by the government. The metric above a little different. It’s produced by a private company and is released two days before the official government report. I find that kind of funny, like it’s some petty form of metric oneupmanship.

But to the chart itself, what we see is what we would expect - during recessions there are a lot of lost jobs. We also know initial jobless claims recently skyrocketed and that the data above only reflects a small portion of those ongoing losses from the coronavirus. This means that we are probably already in a recession (as if the -37% drop in the market didn’t send enough of a signal).

Unfortunately, this jobs report is monthly - so we will have to wait another 30 days to see the true impact of the virus on the economy. It won’t be pretty but that’s to be expected when you shut down the economy for social distancing. Let’s hope it continues to slow the spread.

The Dow’s eighth worst quarter ever

The market does not like the coronavirus

The Dow Jones Industrial Average just posted the worst first quarter in history. It was also the eighth worst quarter overall:

Besides 1987Q4 and 1974Q3, you have to go back a long time ago to find a worse quarter than we just had. It’s just another example of history unfolding before us in the markets.

Generally, I don’t find arbitrary calendar-based market movements all that interesting (i.e. the worst week/month/start to the year etc. etc. since whenever) but I figured it is likely to be a long time before I will have the chance to write about a quarter this bad again. (Hopefully that isn’t a jinx for 2020Q2!!)

As for the quarter itself, January was relatively benign, even as news about COVID-19 got worse. The first half of February saw a new all-time high. Then, it all came undone. February and March both ended with double digit monthly declines.

At it’s lowest point during the quarter on March 23, the Dow was down -34.2% for the year. Fortunately, there was a significant rally off that bottom and instead of being the third worst quarter ever it only ended up being the eighth. That’s still awful but I suppose in today’s world you got to take whatever small wins you can get.

Since the market is forward looking, I would hope that most of the virus damage has been priced in. But, I wouldn’t underestimate the chance for more things to go wrong or that the virus outbreak ends up worse than expected. In that case, 2020Q2 could be bumpy. Let’s keep our fingers crossed it ends up being a rebound quarter!

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