ObamaFacts: Unemployment

Unemployment is an area where President Obama regularly receives robust criticism. Is it appropriate?

Then and Now: The President was inaugurated on January 20, 2009. According to the Bureau of Labor Statistics, that month the unemployment rate was 7.8%. As of May 2012, the last publication, it is 8.2% . The next publication will be July 6th for June. Based on that alone, one might conclude that things have not changed much, and they certainly have not improved. But that may not provide the entire picture.

What Should We Expect Unemployment to Be?  First, how bad is an unemployment rate of 8.2%? According to Trading Economics, "Historically, from 1948 until 2012, the United States Unemployment Rate averaged 5.7800 Percent." Since 1970, the average unemployment rate has been 6.4%. That means we are off the average by at most 2.4%, and more accurately 1.8%, which seems not all that bad. Still, it is not an improvement.

Average Range: The unemployment rate typically rises and falls naturally over time. Since 1970, highs have tended to be above 7.0%. Three times in that time, highs were above 7.8% under both parties. The unemployment rate exceeded 10% for a period of 10 months in 1982 - 83 during the Reagan administration, though there should be no value judgment as the eras and circumstances are quite different. Lows have tended to be below 5% during that time, though the unemployment rate was not below 5% at all from January 1974 until May of 1997. In the 509 months since 1970, regardless of the party of the President, the US has experienced almost twice as many months with unemployment above 7% (170 or 33%) than it has months where unemployment was below 5% (91 or 18%). The unemployment rate has been above 8% almost as often (79 months or 16%) as it has been below 5%. So query whether 8.2% is really much outside of the range of US average unemployment rates for the last 40 plus years?



Trending: When the President took office, unemployment was on the rise. In May of 2007, unemployment hit a rather typical low of 4.4%. By January, 2009, less than 2 years later, it had risen by 3.4% and it continued to rise until October of 2009 when it hit its recent high of 10.0% for one month. Therefore, in a period of 2 years and 5 months (29 months total), the unemployment rate rose by 5.4%, or more than double. Actually, this rise is historically typical. Twenty of those months (69%) occurred prior to the inauguration of the President and nine after. Similarly, 63% of the rise in unemployment occurred prior to and including January 2009. Once the rate hit 9.5%, however, it took 17 months to fall back below that rate. Unfortunately while the rise to the peak has been fairly rapid, the return to the trough (low and good unemployment) has historically taken longer, as seems to be the case this time around.

What is the President's Number? When we evaluate the President, should we start at 7.8% when he took office, 8.7% in March 2009 when the economy hit bottom, or the high of 10% in October 2009? One could argue that whatever the President did or did not do, it is unlikely his policies would have been able to effect this continued rise in unemployment, certainly through March when all other factors hit bottom. So perhaps 8.7% is the number against which the President should be judged. If so, unemployment is down a modest, 0.5%, but at least that is improvement.

Lagging Indicator:  The facts are that historically unemployment lags changes in the economy. In other words, as the economy falls, unemployment tends to stay lower and then rise to its worst point about 2 - 3 quarters after the economy has hit bottom, and vice versa as the ecomony improves. Employers are slow to fire. Belt-tightening plans are laid out, internally costs are squeezed from processes, systems are automated, early-retirement is offered, and finally lay-offs of those who will then actively seek work occur. Some laws prevent rapid lay-offs. Failing small companies hang on as long as possible before closing their doors and sadly letting their family of employees go. Some companies try bankruptcy to hang on. All this takes an employer 2 - 3 quarters after the pain of the recession hits to actually plan, execute and complete.

Since the economy and stock market hit bottom in March of 2009, it would have been predicted that unemployment would continue to fall naturally, at a minimum, until September, 2009, 2 quarters later, and just as likely until December, 2009, 3 quarters later. In this case the peak was in October, 2009, squarely in the predicted range. So perhaps the President's starting point number should be 10%. That means that at least arguably unemployment under the President has fallen by 1.8%, which is progress indeed.

Recovery:  Based on my two prior posts, at least arguably the economy is recovering. Perhaps from the standpoint of the markets, perception and output, we have actually recovered and are growing comfortably. Gross Domestic Product has grown consistently over the last few years, though below its historical average of 3.2%.

One would expect, then, that it will be some months before we see a recovery in the unemployment rate back to historical averages of around 5.8% to 6.4%. BUT we are closer to normal than people are led to believe.