Monday, April 13, 2009

The Recession and Unemployment: Then There Are Statistics

You've heard the adage about there being lies, damned lies and then statistics. Plenty of statistics are tossed around in the discussions of the ongoing economic crisis. One such statistical claim is that unemployment levels are a lagging indicator of recession, and that rising unemployment is not a sign of a worsening economy. That may have been true in the relatively mild recessions caused in the past by the ebb and flow of the business cycle. The current recession, however, was caused by asset and credit bubbles that crippled the financial sector. Fixing the financial sector remains a critical step toward recovery. As long as the financial sector is burdened by toxic assets, it cannot revive.

Today, reported that high unemployment is a more important factor in mortgage defaults than escalating payments in adjustable rate mortgages. In other words, as unemployment rises, more mortgage defaults can be expected. This only stands to reason, since the loss of a job deprives borrowers of the income needed to pay the mortgage. It also means that rising unemployment is a leading indicator of worsening problems for the financial sector. When the unemployed default on more mortgages (and other consumer debt like credit cards and car loans), the toxic assets plaguing the financial sector (which are mostly derivatives of these debts) will fall further from their already depressed levels. The banks' problems--and the recession--may well worsen. The unemployed will also spend less, adding to the drag on the economy. Unemployment, therefore, exacerbates the recession and is a leading, not lagging, indicator of yet more bad times.

To be sure, the government's program for buying toxic assets from banks may reduce the impact of rising unemployment on crippled banks. Accomplishing that, though, requires that the program be implemented. To date, it has been very well announced, but nothing is operational. The devil, as always, lurks in the details and the weight of the available evidence indicates that the government and the banks remain seriously bedeviled.

We're not saying that the recession will definitely worsen or that the stock market will nosedive. We're saying that the conventional wisdom about unemployment levels and recessions probably doesn't work in our current unconventional circumstances. There are many factors that would affect the future direction of the economy. But don't, like too many supposed experts on cable TV, dismiss the significance of rising unemployment.

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