Unemployment hits a low. Then comes the recession.

Keywords Opinion

Stephen Mihm CommentaryWhatever one might think about the U.S. political situation, it’s hard to deny that the economy is doing just fine. In April, the unemployment rate dropped to 3.9 percent, a 17-year low. At this point, there’s a job opening for every unemployed person in the country. Not bad.

In the spirit of seeing the glass as half empty, though, it’s worth asking whether this state of affairs portends something more ominous. For economists, the unemployment rate has always been a lagging indicator: It’s like looking in the rear-view mirror. It tells us where the economy was in the not-too-distant past.

focus-mihm-column-photo-15col.jpg Veterans check out job options during a fair May 2 at the Marion VA Medical Center in Grant County. Low unemployment rates could be a sign a recession isn’t far off. (AP photo by Jeff Morehead /The Chronicle-Tribune)

But one could arguably view unemployment as a leading indicator, if a rather perverse one. If you look at the relationship between the unemployment rate and the 10 most recent recessions in the U.S., it’s striking how quickly recessions follow in the wake of the economy hitting full employment.

One commentator who has crunched the numbers for the 10 recessions that have hit since 1950 found that the average time between troughs in the unemployment rate and the onset of recessions was approximately 3.8 months, with three recessions starting a month after unemployment hit its lowest level; the longest gap was 10 months out from the low point in joblessness.

But that relationship, of course, depends on hindsight: We only know we’ve hit the trough in retrospect. But that’s where the latest unemployment figures are a little unnerving. One, they’re really low. Previous troughs have tended to be higher than 4 percent, not lower. Aside from the low levels of unemployment achieved before the recession of 1953 (when it hit 2.5 percent), the rate normally bottoms out at a much higher rate: 3.8 or 3.9 percent on a few occasions. But the majority of the time, at its lowest it is well above 3.9 percent.

In other words, barring some unusual turn of events, there’s less and less chance it will go much lower.

That wouldn’t be an issue if the unemployment rate typically plateaued for long periods of time, staying at a healthy 3.9 percent for the next few years. But that almost never happens. Instead, the rate tends to move upward as soon as it hits the final low.

The most notable exception to this pattern—the plateau before the recession that hit at the end of 1969—took place a while ago. In short, once we hit the low, if we haven’t hit it already, a recession is more apt to follow pretty quickly.

A possible mitigating factor—the good news, if that’s the way to put it—is that the growing reliance on part-time workers may be cloaking the real levels of unemployment. That is, the “real” level of unemployment might actually be a bit higher than the official data suggests. So perhaps it’s possible there’s slack in the economy. If so, there may be more room for improvement and, with it, the opportunity to kick the can a little further until the next downturn hits.

None of this means the economy is about to tip into a recession. But the historical data suggests that even the most positive economic news may convey ill tidings.•


Stephen Mihm is an author and professor emeritus at the University of Georgia.

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