Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).
We have been asserting for some time now that the issue for the market is no longer how many jobs will be lost or when will we begin adding jobs, although certainly both are important questions. The market’s attention should now be focused on growth over the hill and whether the economy will growth fast enough to address the unemployment issue.
AS such, we can take a look at several periods throughout history to see what type of growth reduces the unemployment rate. Beginning with the 1980s dual recessions, the unemployment rate peaked at 10.8% at the very end of 1982. During 1983 and 1984, GDP grew by 7.7% and 5.6% respectively the sum total of which lowered the unemployment rate by 3.5 percentage points, moving it to 7.3% by the end of 1984.
Following the back-to-back declines in economic output in the last quarter of 1990 and the first of 1991, the economy grew only modestly, growing just 1% during 1991. The unemployment rate subsequently peaked in the summer of 1992 at 7.8%. The economy subsequently grew by 4.3% in 1992 and averaged growth of about 3.75-4% per year from 1992 until the end of 1999. Growth of his magnitude reduced the unemployment rate from 7.3% at the start of 1992 to just 4% at the end of the decade. Eight years, nearly 4% growth on average, and the unemployment rate fell by 3.3 percentage points.
In the most recent recession, the unemployment rate hit 6.3% in the summer of 2003, eventually moving down to a low of 4.4% late in 2006, a decline of about 2 percentage points.
During 2003, 2004, 2005 and 2006, growth in economic output averaged just about 3%. That’s four years of 3% growth, on average, and the unemployment rate fell by 2 percentage points.
These historical comparisons are of crucial importance today as the United States finds itself in a situation where we are about to pass through the 10% level on the unemployment rate since the summer of 1983 while quarterly growth going forward, whatever you think about the situation, will not be north of 8% or 9% as it was in 1983. Seeing as how we are dealing with a 10% unemployment rate, even if economic output grows at a healthy clip, say 4% per year, the unemployment rate is going to stay elevated for many years. Such a reality does not preclude economic recovery and does not mean consumers are going to disappear. However, it does mean the recovery is going to be bumpy, complicated and could be difficult for several quarters. Inflation is going higher, unemployment is going higher, taxes are going higher, regulation is going higher and debt is going lower. 1983 this is not.