Is Unemployment a Lagging or a Leading Indicator?

There’s a very interesting animated graphic done by Chris Wilson at Slate.com. It shows the progression of unemployment by US county over the last 2 years. I reproduce the beginning and ending stages of the graph for you below, and apologize to those of you who are reading this in black and white, as it won’t be as dramatic. But if you watch the entire series, it shows how rapid the deterioration in unemployment has been. (It takes about 10 seconds.)

The first graph shows that 2.6 million jobs had been created in 2006. The last one shows that job losses were 5 million through March, and if we add in April and estimates for May, it will be close to 6 million. Again, the actual animation is dramatic, and made my daughter go "Ouch!"





It's been 50 years since we’ve seen unemployment drop as rapidly as it has in the current recession. Given that we have a much smaller percentage of manufacturing jobs now, that volatility is breathtaking. Look at the data since 1930 from the St. Louis Fed:



The typical pundit keeps telling us unemployment is a lagging indicator, and that the recovery will be well under way before it shows up in the job numbers. Therefore, you should buy what they’re selling, because the recovery is on its way. But that may not be the case this time. One of my favorite reads, when I get to see it, is the economic analysis from Bridgewater. They’re among the best thinkers anywhere, and everyone who follows them gives them a great deal of credence. This is what they wrote about unemployment being a lagging indicator last month:

"Normally, labor markets lag the economy because incremental spending transactions are financed via debt, stimulated by interest rate cuts. But as long as credit remains frozen, spending will require income, and income comes from jobs. And debt service payments are made out of income. Therefore, in a deleveraging environment job growth becomes an important leading, causal indicator of demand and other economic conditions.