During recessions many people lose their jobs. And when economies start to grow again, those who lost their jobs get back to work, right?
Well, it’s not that simple. Peak unemployment has lagged recoveries, so when the economy was supposed to be improving, the employment situation continued to get worse before it got better. Figure 1 shows the unemployment pattern for King and Snohomish counties for the current and three previous national recessions. Each business cycle era is a different color. The period defined as the recession itself is a solid line. The period prior to the recession is a dotted line and the period after is a dot/slash line. Each recessionary period centers on the peak month of unemployment.
In the three previous recessions—beginning in 1990, 2000 and 2007—unemployment in the Seattle area peaked after the recession had officially ended. In the case of the 1990 and 2000 recessions, well over a year after. (The red lines show the current recession, the pattern of which is so different from the previous patterns as to render comparisons pointless.)
Why does unemployment lag the official business cycle? Start with the fact that no one knows we are in a recession until the National Bureau of Economic Research (NBER) declares that we are, based on several months of economic data. The current recession was extremely obvious, but the start of downturns has not always been so obvious in the past in real time. No one knows when the economic peak happens until it has passed. So employers are slow to lay off workers and reduce capacity until they really see things spiraling downward. Recessions have mostly been preceded by tight labor markets, and employers will have worked hard to that point to build and train their workforce. They will be reluctant to let them go too soon.
In the Seattle area, some lags have been even more pronounced. In the 1990 recession, national unemployment peaked eleven months after the recession ended, but in the Seattle area, unemployment did not peak until 21 months—almost two years–after the end of the recession.
Figure 2 compares Seattle and the nation in the 2000 recession.
National unemployment hit its peak seven months after the recession ended, but in the Seattle area, unemployment peaked 16 months after the recession ended.
One factor is Seattle’s historic reliance on capital goods industries like ships, airplanes and trucks. When businesses are struggling, the easiest thing to cut back is investment in new equipment, and recovery in capital investment will stretch out well past general economic recovery. Also, recall that the 2000 recession was closely followed by the 9-11 attacks, which hurt airlines badly and, consequently, delayed Boeing production.
Figure 3 compares the national experience to the Seattle experience in the 2007 recession.
By this time, things had changed. The Great Recession dragged on for a full 18 months, so employers had lots of time to realize that they needed to cut back their workforces. Nationally, unemployment peaked four months after the end of the recession, and in the Seattle area, it peaked three months after the end. Boeing was not as badly affected by that recession, and the region’s technology industries provided much-needed stability.
Looking Ahead
It is likely that NBER will declare the recession over in a fairly short timeframe. All important indicators have been trending upward since their low points in April and May. There is no doubt that unemployment peaked in May. The June, July and August employment reports have shown both job growth and drops in unemployment.
The concern is the length of the tail on both job growth and unemployment. A number of industries simply cannot recover until there is a vaccine. And while some industries are growing well in the new economic environment, there will be substantial friction in the process of shifting labor from slow-recovering industries to fast-recovering ones. It would not be surprising if the red line in Figure 1 flattened considerably in the next few months.
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