Unemployment before and after Covid

Yesterday we looked at the trend of unemployment based on the Obama years (but after the Great Recession), and based on the Trump years (but before the Covid shock). I wanted to show a third graph, with the trend based on the Biden years after the Covid shock, when unemployment appears to have returned to its normal behavior. But that graph didn't show anything useful. I don't know why.

Maybe there was not enough data between July 2022 and August 2024 to make a trend line that looked reasonable in the pre-Covid years. Or maybe the Fed's high interest rate started pushing unemployment up in early 2023 (as I said before) and put a "kink" in the trend line. And maybe the kink shows up as a massive mismatch between trend and data in those pre-Covid years. I dunno. But I couldn't use that graph.

So I went back to FRED's unemployment data. In red, I underlined two years of data before the Covid shock, and two years after it. I want to compare the two underlined periods:

This Graph at FRED: https://fred.stlouisfed.org/graph/?g=1uyts

By eye -- my eye, at least -- the post-Covid increase seems to be accelerating upward noticeably faster than the pre-Covid decrease was slowing. As I said a couple of weeks ago:

To my eye, unemployment started going up around January 2023 - more than a year and a half ago, now -- and started accelerating around January 2024. They waited too long before bringing rates down.

It still looks like that, to me. But I don't trust my eye more than I trust arithmetic. So in Excel, I sorted the March-2018-to-Feb-2020 data in reverse-date order, turning the decrease into an increase. Then I showed the two periods starting together on a graph. Here is the result:

Comparison of Pre-Covid data (reversed) and Post-Covid data

There's not much difference between the two lines. They start at 3.5 percent unemployment, both of them, and after two years they end up only 0.2 percent apart. On this graph, I don't see the recent accelerating increase of unemployment that I thought I saw on the underlined FRED graph.

But after sleeping on it, I notice that the left half of the graph shows the blue line mostly at-or-below the orange line. And the last seven or eight months show the blue line mostly at-or-above the orange. So the difference between the two lines may be more than the 0.2 percent difference we see between the August 2024 and March 2018 data.

I could take the blue line and move it up by 0.1, more or less centering the blue line on the orange in that first year. This might even be a reasonable manipulation of the data, given that I want to see the differences that arise in the second year.

Here's how the graph looks with the blue line values increased by 0.1:

By eye, at least, the blue line is roughly centered on the orange through 2022 and 2023. In December 2023 and January 2024, the two lines are identical at 3.8 percent unemployment. For the rest of 2024, blue gains on orange: The post-Covid increase in unemployment outpaces the (chronologically reversed) pre-Covid decline. This is the acceleration I was looking for! The arithmetic confirms the eye.

 

Is it reasonable to take a two-year decline in unemployment, put it in reverse chronological order, and compare it to a two-year increase? I dunno. It seemed reasonable, at the time.

Are we gonna have a recession? I dunno. I expect one, yeah, but I don't predict.

Does it matter if we get a recession when we could have avoided one?  Yes, definitely.

Does this post show that the Fed should have started lowering the interest rate during or before January 2024? Yes, definitely.

Recent Trends in Unemployment

First, the downtrend of unemployment after the financial crisis and the 2008-09 recession:

The gray line shows the rate of unemployment since January 2007. On today's graphs, the gray shows the FRED data from

https://fred.stlouisfed.org/series/UNRATE

The blue line on this graph shows that data for the Obama years, beginning about when the unemployment rate started falling. The red line, here a "linear" or straight-line trend, was calculated by Excel from the data indicated in blue on the graph. (For both graphs today, the blue line indicates the data Excel used to calculate the trend line.)

The change in unemployment, from  more or less above the trend line in 2012-2013 to more or less below the trend line in 2014-2015, is probably an indication that the economy was at last starting to do better by 2014. The change in the blue line to mostly horizontal in 2016, was due to other changes in the economy. Off the top of my head I'd say the Federal Reserve, increasing interest rates in late 2015 and after was the  cause of that relative-to-trend increase. (The Fed kept the interest rate at zero from late 2008 until December 2015.)

Not a linear trend, this time. Excel calls this one a second order polynomial.

I find it interesting that this Trump-years-sans-Covid trend line fits so well with the Obama-years data back to 2013 or before -- and also runs close to the gray data since early 2022. This suggests to me that, Covid shock aside, the rate of unemployment was all very much part of a pattern that had little or nothing to do with Donald Trump.

I note that the monthly unemployment rate hung in there at 3.6 percent from October 2019 to January 2020, then fell to 3.5 percent before skyrocketing in March as Covid made itself known. I figure the Covid shock to unemployment came to an end in March 2022 when unemployment again reached 3.6 percent.

That same month, March 2022, also happens to be when the Fed started raising the interest rate to fight the inflation that Jerome Powell had warned us about a year before, in March 2021. So it looks like the Fed was waiting for employment to get back to normal before they started raising interest rates. And in fact that is what they said they would do. In the transcript of the March 17, 2021 press conference, Powell said:

With regard to interest rates, we continue to expect it will be appropriate to maintain the current 0 to ¼ percent target range for the federal funds rate until labor market conditions have reached levels consistent with the Committee’s assessment of maximum employment...

(My bold.) But I'm not sure that decision was sound. Inflation went absolutely crazy between March 2021 and March 2022, while interest rates remained at zero. I think the Fed's "decision" was an excuse that Powell used because Trump had manipulated the Fed into agreeing to delay interest rate increases for a year, to let inflation go up to make Biden look bad. You know, election interference.

A timeline of thinking about debt

From 1934, from John Maynard Keynes, ref The Essential Keynes:

I see the problem of recovery, accordingly, in the following light: How soon will normal business enterprise come to the rescue? What measures can be taken to hasten the return of normal enterprise? On what scale, by which expedients and for how long is abnormal government expenditure advisable in the meantime?

From 1937, from Yglesias, ref DeLong:

Back in 1937, John Maynard Keynes warned Franklin Roosevelt that “the boom, not the slump, is the right time for austerity at the Treasury.”

From 1949, from the "Report of the Joint Committee on the Economic Report":

The first inescapable principle of successful [federal] debt management is successful maintenance of high levels of national income... The servicing and retirement of private indebtedness likewise will be impossible unless national income remains high. It, too, should be paid off as much as possible in boom years.

And then something changed.

From 1965, from Time Magazine via Brad DeLong, on repayment of debt:

Nor, in perhaps the greatest change of all, do [businessmen] believe that Government will ever fully pay off its debt, any more than General Motors or IBM find it advisable to pay off their long-term obligations; instead of demanding payment, creditors would rather continue collecting interest.

From the 1975 edition of Campbell McConnell's Economics, pp. 280-281:

Although the size and growth of public debt are looked upon with awe and alarm, private debt has grown much faster. Private and public debt were of about equal size in 1947. But private debt has grown much faster and is now over three times as large -- about $1,350 billion, compared with $470 billion -- as the public debt.

If you insist upon worrying about debt, you will do well to concern yourself with private rather than public indebtedness.

 

From 1981, from Benjamin Friedman:

This paper documents a long-standing stability in the relationship between outstanding debt and economic activity in the United States...

From 1986, from Benjamin Friedman:

The U.S. economy's nonfinancial debt ratio has risen since 1980 to a level that is extraordinary in comparison with prior historical experience.

From 1995, from Elba K. Brown-Collier and Bruce E. Collier:

The policies pursued in the United States over the last forty years have not been consistent with Keynes' proposals for economic stabilization and have caused ever increasing deficits and financial instability.

 

From 2009, from Ben Bernanke in "The Crisis and the Policy Response":

Liquidity provision by the central bank reduces systemic risk by assuring market participants that, should short-term investors begin to lose confidence, financial institutions will be able to meet the resulting demands for cash without resorting to potentially destabilizing fire sales of assets.  Moreover, backstopping the liquidity needs of financial institutions reduces funding stresses and, all else equal, should increase the willingness of those institutions to lend and make markets.
...
By serving as a backup source of liquidity for borrowers, the Fed's commercial paper facility was aimed at reducing investor and borrower concerns about "rollover risk," the risk that a borrower could not raise new funds to repay maturing commercial paper.  The reduction of rollover risk, in turn, should increase the willingness of private investors to lend, particularly for terms longer than overnight.
...
In contrast, our forthcoming asset-backed securities program, a joint effort with the Treasury, is not purely for liquidity provision... If the program works as planned, it should lead to lower rates and greater availability of consumer and small business credit.  Over time, by increasing market liquidity and stimulating market activity, this facility should also help to revive private lending.
...
A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions' balance sheets.  The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending.

If that's not Excessive Reliance on Credit (EROC), nothing is.

After 75 years...

 

From the Google Book:

 
From page 3. I omit their "basic circumstances" and go straight to "the guides to economic policy":

My immediate reactions: 

• Number (1) is a complete failure. 
• Number (4), after 75 years, can only be seen as some kind of joke. 
• Number (6) can be restated as my call for policy to accelerate the repayment of private sector debt -- to fight inflation; to counterbalance existing policies that accelerate credit use; to reduce the risk of financial crisis and deflation; and to promote economic vigor.
  

Things did not work out according to the 1949 plan. The problem was not that they failed to understand what was required. They understood, and they were clear on it. On the topic of federal debt, under the heading "The Problem of Debt Management" on page 4 they say:

The first inescapable principle of successful debt management is successful maintenance of high levels of national income.

To deal with debt successfully requires a vigorous economy and "successful maintenance of high levels of national income". I make the same argument today: I call for more rapid economic growth in these times of excessive debt. 

On the next page, they restate their thought:

High-level income, high-level production, high-level employment is indispensable to national solvency.

However, they do not consider federal debt alone. They also note:

The servicing and retirement of private indebtedness likewise will be impossible unless national income remains high. It, too, should be paid off as much as possible in boom years.

The failure of mainstream economists to accept the 1949 view of credit and debt for the last 50 years is the cause of the decline of the US economy.

The more we rely on credit, the more we need policy to encourage repayment of debt. The deeper we are in debt, the more we need "boom years" to reduce our debt. The more we reduce private debt, the sooner will vigor return. And the sooner we restore economic vigor, the sooner will our efforts to reduce public-sector debt succeed.

The NFL can go to Hell

I WILL NOT WATCH a football game that shows the amazon smile after every replay.

Necessary but not sufficient. But necessary.

In Free to Choose, Milton Friedman wrote:

Many societies organized predominantly by voluntary exchange have not achieved either prosperity or freedom, though they have achieved a far greater measure of both than authoritarian societies. But voluntary exchange is a necessary condition for both prosperity and freedom.

Confidence and Sentiment

FRED has two datasets that I want to look at today: Consumer Confidence, and Consumer Sentiment. Here's the default view:

This Graph at FRED: https://fred.stlouisfed.org/graph/?id=CSCICP03USM665S,UMCSENT,

It doesn't make a pretty picture.

I want to compare the two datasets. Some of the early years' data is intermittent. I can make the red line start at an earlier date by changing the data from monthly to annual. Since I want to compare them, I will change both datasets to annual.

Mimicking a project I worked on, egad, eleven years ago, I want to center each dataset on the zero axis, by subtracting the series average from each value in the series. Centering both datasets at the zero level centers them on each other, and makes them easier to compare.

You can see that the red line has much greater up-and-down spread than the blue line. That up-and-down spread is measured by the standard deviation. I will take the datasets (after the subtraction) and divide each one by its standard deviation. This makes the up-and-down variation the same for the two datasets. So now they're centered, the one on the other, and they are the same height. That should make them easy to compare visually.

Next, I want to smooth out some of the jiggies. Changing the monthly data to annual helped with that, but not enough. So I'm figuring each dataset as a 5-year moving average, with the data plotted at the midpoints of the 5-year periods.

That's it for data manipulation. Here is the result:

The two datasets are now so similar that they almost look identical. This seems odd to me, given that the data measures people's feelings. I will evaluate the result anyway.

For both datasets, the high points occur in the early 1960s, the mid-1980s, the late 1990s, and the Trump years. The low points occur in the 1970s, the early 1990s, the years around the financial crisis, and, well, the Biden years.

So now we know why the Trump years are so fondly remembered.

Now that I know what to look for, I can see it on the first graph, too. There is a big increase in the red line (consumer sentiment) in the latter part of 2014: From barely above the 80 level, it rose to near 100. That was followed by a second jump, a rebound from just below the 90 level in October 2016 to just below 100 in January 2017. That gives us the high in the Trump years.

There was a similar sharp rise in 1983 on the first graph, from near the 70 level at the end of 1982 to above the 100 level in early 1984. That increase arose, I think, from the boost Reagan's charm gave to the recovery after the 1982 recession.

The high of the latter 1990s was different. There was gradual increase from the early-90s low: gradual increase, rather than sudden increase. Consumer sentiment in the 1990s rose along with the improving economy. 

The economy doesn't improve in a sudden blast. If consumer sentiment does, it has more to do with "charm" than with economic performance.