There are a few data points that can help determine how deep the decline will be from the economic slowdown and how long it will take for the recovery to get back to prior levels.
We can look at some key employment data to measure the depths of the decline. Weekly initial jobless claims have been gaining attention because they are setting new records. This data measures how many people are making a first time claim for unemployment insurance. Anyone who is not working and qualifies for unemployment can file an initial claim, including furloughed workers. Continuing jobless claims track how many people stay on unemployment insurance after they initially file. Workers that have been furloughed or are temporally unemployed do not count toward continuing claims. By tracking this data point, it will help determine the number of permanent (no end date) unemployed workers. The charts and tables below use the four-week moving average of initial claims and the weekly continuing claims. The charts show initial and continuing claims from the end of the economic cycle, through the recession, and into the start of the next recovery period. For this analysis, we looked at the recessions in 1981, 1990, 2000, and 2008. The table is a summary of the number of weeks from where initial claims started to increase until they reached their peak, and then when they bottomed (note in 2006 initial claims did not get back to the 1999 low before increasing again). The full cycle measures the number of weeks it took for initial and continuing claims to get back to the level they were at before they started to increase prior to the recession (again, 2006 is when they reached a low before they started to increase).
1981 Recession
Initial claims started to increase on April 11, 1981 at 406,500, peaked on October 9, 1982 at 674,250 (78 weeks), then dropped below 405,500 again on July 23, 1983 (41 weeks).
Continuing claims were at 2.8 million on April 1, 1981, peaked at 4.7 million on October 6, 1982 (82 weeks), then dropped below 2.8 million again on February 11, 1984 (66 weeks).
Source: FRED.
1990 Recession
Initial claims started to increase on February 4, 1989 at 287,000 and peaked on March 30, 1991 at 501,250 (112 weeks), then dropped below 287,000 again on September 11, 1999 (441 weeks).
Continuing claims were at 2.07 million on February 4, 1989 and peaked on May 4, 1991 at 3.524 million (117 weeks), then dropped below 2.07 million again on November 13, 1999 (445 weeks).
Source: FRED.
2008 Recession
Initial claims started to increase on February 4, 2006 at 286,500, peaked on March 28, 2009 at 659,250 (164 weeks), then dropped below 286,500 again on February 7, 2015 (306 weeks).
Continuing claims were at 2.52 million on February 4, 2006, peaked on May 16, 2009 (155 weeks) at 6.539 million, then went below 2.52 million again on August 23, 2014 (275 weeks).
Source: FRED.
2020 Recession
The current 4-week average for initial claims is 5.035 million and continuing claims is 17.92 million.
Historically, initial claims peak a few weeks prior to continuing claims, excluding 2009. Initial jobless claims the week of April 18, 2020 were higher than they were on April 25th, therefore continuing claims could soon peak. Both indicators have made new highs and did so in record times. Initial claims peaked on April 18th after only five weeks, while the average from the prior four recessionary periods was 108 weeks. There is a possibility that these numbers will get back to new lows in record time, but the prior data highlights how long these labor market cycles can be.
Another employment gauge that is helpful to determine the amount of permanent job losses is the labor force participation rate. This data series tracks the percentage of eligible workers (of working age) that are actively working or are unemployed and looking for work. The percentage of people that are not in the labor force typically increases during recessions as workers either chose to retire or become discouraged and decide not to look for new employment. A decline in the participation rate can be an indication that workers view the employment outlook to be weak enough that they are not going to actively seek out a new position. In the 1981 and 1990 recessions, the participation rate eventually started to increase and get back above the high prior to the start of the recession. Following the 2000 recession, the participation rate continued to decline until July 2015 when it started to increase again.
Source: FRED.
Source: FRED.
Source: FRED.
Source: FRED.
Each economic cycle has unique characteristics and recovers at their own pace. Monitoring these labor market dynamics may help determine how much economic ground needs to be covered and the pace at which the recovery is taking hold.
The main driver of the U.S. economy is consumer spending. During each recession from 1981 through present-day, the savings rate has increased by at least a few percentage points. This typically occurs because spending drops faster than income. The amount by which the savings rate increases, and how long it takes to come down, can have an impact on the size of the recovery and the timing of when it occurs. After the recessions in 1981 and 1990, the savings rate moved back to pre-recession levels within two years. After the recessions in 2000 and 2008, the savings rate stayed elevated for several years, potentially delaying the recovery and limiting the magnitude. According to the March 2020 release, the savings rate had increased to 13%, the highest in 40 years. If the savings rate remains elevated for several years, like the last two cycles, the recovery may take an extended amount of time to take hold.
Source: FRED.
Source: FRED.
Source: FRED.
Source: FRED.
Source: FRED.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC