Dismal Scientists Miss the Optimism in Jobs Data

Last week's jobs report shocked just about everybody with a Ph.D. in economics. On average, economists expected that the economy would shed more than 100,000 jobs. The actual number was only 11,000, and the unemployment rate declined, to 10 percent.

Economists were almost unanimously incorrect about the start of the recession, fundamentally clueless about the depth of the recession, and now it's looking like they will get the end of the recession wrong, too.

Data surprise all the time, of course, but the divergence between consensus and reality in this case was unusually large. It calls into question other elements of the consensus view.

The economy tends to snap back more quickly after a steep drop.

That view holds that unemployment will continue to worsen well into next year, perhaps reaching 11 percent, because job creation typically trails the rest of the recovery. An unabated decline is seen as so much of a sure thing that both parties held jobs events last week to discuss policies to address the looming labor-market nightmare.

A look at the history of job creation over the business cycle suggests that this prevailing view needs to be given a big fat asterisk.

Since 1950, there have been 10 recessions in the U.S., the most recent one beginning in December 2007 and most likely ending, given the preponderance of the data, last July.

If the recession did end in July, then the November decline in unemployment began in the fourth month after the recession's trough. A four-month delay is a negative surprise. In the nine previous recessions, the average wait from the end of the recession to the first decline in unemployment was only 2.4 months. So this time it took a little longer.

Warped Narrative

Why, then, did so many experts expect the lag to last still longer this time? The biggest reason is the widespread acceptance of a false narrative regarding the relationship between jobs and recessions, a narrative warped by the two most recent recessions before this one.

It is true that job creation often lags behind the economic cycle. While unemployment can blip down in the beginning of a recovery, the improvement rarely sticks; in seven of the previous nine recessions, the initial decline was reversed in subsequent months.

In the last two recessions--July 1990 to March 1991, and March to November 2001--unemployment had a life of its own, continuing to surge for more than a year after the trough. Those back-to-back experiences seem to have influenced how experts viewed what would happen in the current recovery. But the last two recessions are probably not the best guide. On the way down, recall, they were so mild that economists had begun to accept the view that the world had undergone a “Great Moderation.”

Reason for Optimism

A more apt model--and certainly a more optimistic one--would be what happened at the ends of recessions in 1975 and 1982. In those cases, the first decline in the unemployment rate signaled the good news that a sustained jobs recovery had begun.

In 1975, the unemployment rate peaked two months after the end of the recession at 9 percent, and then began a steady decline that lasted almost five years. In 1982, the unemployment rate peaked at 10.8 percent one month after the end of the recession, and plummeted from there at a rate of about 1.5 percentage points per year. Those two recessions are the only ones since World War II that rival the current one in severity.

An explanation for this connection comes from academic work on why the economy tends to snap back more quickly after a steep drop.

This behavior, first observed by Milton Friedman, is analogous to that of a string on a guitar. The harder you pluck the string, the quicker it snaps back.

Goodbye, Panic

Or think of it in these human terms: Recovery is faster after a panic, because unlike more gradual forces such as a decline in manufacturing, panic is 100 percent gone when it stops.

Given the enormous doubts that persist about the health of the real-estate market, massive government deficits and probable tax increases, it would be imprudent to count on a rapid jobs recovery. We have, after all, only a couple of precedents that rival this recession in severity. Moreover, the unemployment rate is so high that it would be callous and irresponsible to reject out of hand policies to accelerate job creation.

But if history is a guide, November's good job news signaled that the worst may be behind us, and the unemployment rate will improve from here. If the unemployment rate drops again in December, don't be surprised.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author


Kevin A.

What's new on AEI

AEI Election Watch 2014: What will happen and why it matters
image A nation divided by marriage
image Teaching reform
image Socialist party pushing $20 minimum wage defends $13-an-hour job listing
AEI on Facebook
Events Calendar
  • 27
  • 28
  • 29
  • 30
  • 31
Monday, October 27, 2014 | 10:00 a.m. – 11:30 a.m.
State income taxes and the Supreme Court: Maryland Comptroller v. Wynne

Please join AEI for a panel discussion exploring these and other questions about this crucial case.

Tuesday, October 28, 2014 | 9:30 a.m. – 12:15 p.m.
For richer, for poorer: How family structures economic success in America

Join Lerman, Wilcox, and a group of distinguished scholars and commentators for the release of Lerman and Wilcox’s report, which examines the relationships among and policy implications of marriage, family structure, and economic success in America.

Tuesday, October 28, 2014 | 5:30 p.m. – 7:00 p.m.
The 7 deadly virtues: 18 conservative writers on why the virtuous life is funny as hell

Please join AEI for a book forum moderated by Last and featuring five of these leading conservative voices. By the time the forum is over, attendees may be on their way to discovering an entirely different — and better — moral universe.

Thursday, October 30, 2014 | 2:00 p.m. – 3:00 p.m.
A nuclear deal with Iran? Weighing the possibilities

Join us, as experts discuss their predictions for whether the United States will strike a nuclear deal with Iran ahead of the November 24 deadline, and the repercussions of the possible outcomes.

Thursday, October 30, 2014 | 5:00 p.m. – 6:15 p.m.
The forgotten depression — 1921: The crash that cured itself

Please join Author James Grant and AEI senior economists for a discussion about Grant's book, "The Forgotten Depression: 1921: The Crash That Cured Itself" (Simon & Schuster, 2014).

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.