Does unemployment whiplash mean recession?

0:00NPR

0:11It's Jobs Friday! Woo! That's right. Once a month, we put aside the stock market. Who cares? Who cares? We put aside all the other indicators. Never heard of them. And we check in on how the workers of America are doing. Yeah, about two-thirds of all American adults are in the labor force. And in September, 254 ,000 jobs were added to the U.S. economy. It's an unexpectedly strong month. The unemployment rate ticked down very slightly to 4.1%. It's relieving news for workers after a pretty lackluster summer. We are at this critical moment in the economy. Unemployment in America is like being on a sheet of ice.

0:55After a few cracks, the sheet collapses, and a lot of people lose their jobs really fast. And then it's usually a long, slow, steady struggle over years to get everyone back out of the icy waters of unemployment. That has been the historic pattern for almost every recession over the past 70 years. This is The Indicator from Planet Money. I'm Waylon Wong. And I'm Darian Woods. Today on the show, unemployment on thin ice. How it's easier to break the economy than to fix it. And whether we can escape from the patterns of the past.

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3:16Today was a welcome break from the labor market cooling we've seen in recent months. And it got us thinking about where we are right now, especially when you look at history. Firstly, given that earlier cooling, could we still be on the verge of a big jolt up in unemployment? And then if the economy does reach a recession, could anything be done to speed up the recovery? John Steinson is a macroeconomics professor at UC Berkeley. I asked him if the teetering rise in unemployment that we had over the summer could be a flashing red alert. I mean, that's absolutely right if you look at history. John said that there is this pattern called the Psalm Rule.

3:56That pattern has stated essentially that when unemployment rises from its year-long low by half a percentage point, then you're in a recession, and then unemployment tends to shoot way up. That rule has basically always been true for like more than 50 years. So, you know, we just broke the SAHM rule like a few months ago. And according to that rule, we are in for a recession. John thinks the SAHM rule may not apply this time, though. He says there is more to the possible recession story. Usually there's some reason behind it. Like, you know, in 08, it was the banking crisis. In 01, it's the bursting of the dot-com bubble.

4:39And in 1991, there's the fall of the Berlin Wall and big cuts in military spending. And so you can point to things in many of those other instances where you say, OK, there's some reason why unemployment started to rise very rapidly. John says there are often two big triggers in particular. Most of the recessions are either accompanied by a very sharp increase in oil prices or very tight monetary policy or both. Tight monetary policy, meaning basically the central bank setting high interest rates. And so that's true of basically every recession since, you know, 1973. Right now, John says, we don't see a gigantic shock in the U.S.

5:23economy. Despite the wars in Ukraine and the Middle East, oil prices are high, but not through the roof. And the Federal Reserve is loosening monetary policy right now, not hiking interest rates. And even if there is a spike in oil prices, John also points out that oil is less important as an input for other parts of the economy than it was 30 or 50 years ago. So I still feel cautiously optimistic. But what if unemployment was to jump up? What can history teach us? It's easier to break the economy than to rebuild it. Rebuilding takes a long time. so in the rebuilding phase you have the unemployment rate kind of steadily falling relatively slowly and that can go on for years and years and years and actually that's one of the things that i find most interesting about the behavior of the unemployment rate is just how long it can take so you take the 1990s where we had almost 10 years of continuous expansion And most economies thought by the middle of it, oh, the unemployment rate is down to five point something.

6:30You know, it's probably not going to go much lower. But that would turn out to be wrong. The same thing happened in the 2010s after the Great Recession. This really steady but slow drop in unemployment year after year. And the thing that's particularly striking about this is that even in these extremely long expansions, it's like we never see the bottom. You would expect that at some point we would see a flat spot in the unemployment rate. And in the 1990s and 2010s, we just basically never saw that. Now, creating more jobs than a lot of people thought was possible, that's a great thing. But did it have to take a decade?

7:11Millions of Americans were struggling with unemployment while the economy slowly woke up from its slumber. John has a story that he starts with. Think about kind of building up like a factory or that kind of thing. You build one floor and then you build the next and you build the next and all that takes time. And it may well be that, you know, hiring people is similar. You have to construct teams, you have to make sure they work together and all of this just kind of takes time. And from the perspective of the worker, people can take a long time to get ready for a new job. Pam Nichols Antakaya has decades of experience connecting people with work in California.

7:51Mostly she worked for county agencies, helping people on welfare get jobs. She's also worked with teenagers in special education finding employment. I started way back in 1992, I believe, and I loved it. Pam remembers the waves of layoffs around the time of the dot-com bubble crash. There was a lot of people that were so upset and depressed. And I understood that because they had been doing a good job and the company was thriving, you know, as they knew when they had families. And, you know, so it was really hard for them to go through. One of the first things Pam would get them to do would be to take a test.

8:29What kind of job would suit them? Maybe it was different from their old job. We would pay for the school or, you know, through our program. and it would retrain them. And then after they were done with the school, we would help them with employment. Deciding on that new career, getting a qualification, landing an entry-level job that might grow into something more, that all takes time. Yeah, some of the education took years. So given the time it takes for both the workers and employers to adapt to a new economy after a recession, is there anything that can be done? John Steinson says a major exception to the slow recovery pattern can be seen during the COVID pandemic.

9:12That's the only recession that is totally different. After the big spikes in unemployment in the spring of 2020, jobs rapidly came back. So is it true that the government can do things to really speed up the recovery process? John points out that it could be the case that COVID was special. A lot of people were on temporary layoffs or furloughs at the start of COVID. That was unusual and could explain the quick recovery. But the other hypothesis, the other possibility, is that it was really the extremely large stimulus that the government engaged in after COVID that kind of kick-started the economy much faster than in a normal recession.

9:54Of course, there were downsides. While inflation was this global phenomenon, it's generally agreed that the stimulus at least contributed to high inflation. So maybe we overdid it a bit during, you know, after COVID. But that's a tantalizing possibility that next time, maybe the government just should be more aggressive in its stimulatory policy. Now, I don't know the answer. We have like one observation that's very different. So I understand your agnosticism, but do you have a hunch? I mean, I have to try to be a good scientist. And when you're a good scientist and you have one observation, you really should not try to theorize too much about it.

10:33But of course, one wants to believe that it's easier to recover from recessions than we thought prior to COVID. If I were in government next time there's a recession, I would definitely advocate trying it. Let's see if it works again. As scientists love to close with, more research required. This episode was produced by Angel Carreras with engineering by Sina Lafredo. It was fact-checked by Sierra Juarez. Cake and Cannon edits the show and The Indicator is a production of NPR.

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