Mark for Recession – Unemployment Rate

In my opinion, if there is one indicator to demarcate a recession from a depression, it will be unemployment rate. It will be too shallow a thinking that after the stock market rallied off its March 2009 low, the media and many pundits seem to be fixated on the financial markets to determine the severity of the crisis and to call its end.

The crash of 1929 proved to be the only prelude to further heavy losses in 1930-32. After the initial crash from 381 to 199, a huge rally emerged – prices rose all the way back to 294 for a 48% bear market rally. Initial losses were roughly cut in half. As we all know now, this optimism proved to be, well, premature as it turned out just a bear market rally, soon the market started to tank again. Stocks tumbled back to the crash lows, market cascaded lower for another two years and from the high during the summer of 1929, the losses amounted to a staggering 89%.

Fast forward to the bear market rally of 2009 – the rising sentiment does not forecast a betterment of the economy. Instead, a rising stock market foregoes rising optimism. I think that the next few weeks and months will not only be very interesting, but also very important because hardly anybody that I talked-to seems to think about the possibility of a new stock market low.

If we look at unemployment rate of the 1930s, the official US unemployment rate rose from the cycle low of 3.2% in 1929 to 15.9% in 1931 before it peaked at 24.9% in 1933 and hovered around 20% plus over the next two years after that. Contrast with the current timing, the rate rose from the low of 3.4% in 2007 to a recent high of 9.5% as of June 2009. If we look at civilian employment to population ratio, the downtrend in job market had already started in 2000, then the stock market burst. This was just the first act in a much longer drama.

These statistics clearly show that the severity of the current situation. Here you can see why this rally is not a garden variety post World War II recession, but something very different. The current plunge is secular, not cyclical and the world economy has a lot of rebalancing to do and this process will last much, much longer than the ‘green shoots’ crowd deems possible.