Jump in U.S. Jobless Rate Always Signaled Recessions

The U.S. economy may be on the verge of -- or already in -- a recession, based on the increase in 2007's unemployment rate, economists said.

The jobless rate rose to 5 percent in December, the highest in two years. The figure was 0.6 percentage point higher than March's 4.4 percent, which was the lowest reading of the expansion that began at the end of 2001.

Since 1949 the unemployment rate has never risen by this magnitude without the economy being in recession, John Ryding, chief U.S. economist at Bear Stearns Cos. in New York, said in a note to clients. We now put ourselves on recession watch.

Before the start of the last contraction in March 2001, the unemployment rate rose just 0.4 percentage point, according to Labor Department figures. The rate barely rose at all ahead of the 1990-91 downturn, one reason why economists consider it a so-called lagging signal.

The National Bureau of Economic Research, which determines when recessions begin and end, defines them as a significant decrease in activity over a sustained period of time. The declines would be visible in gross domestic product, payrolls, production, sales and incomes.

The increase in the jobless rate is disturbing indeed, Victor Zarnowitz, 88, a senior fellow at the New York-based Conference Board and a member of the NBER group that dates contractions, said in an interview. A lot of people would rule out that a recession is pending. I would not. It's too early to say and it's perhaps not very likely that it will come, but I would not rule it out.

Economy Changing

The reason other indicators, such as sales or payrolls, have yet to unequivocally signal a downturn has begun is because the U.S. economy has undergone significant structural changes, said Allen Sinai, chief global economist for Decision Economics in New York.

The economy managed to eke out an 18,000 gain in payrolls last month thanks, in part, to increases in hiring by health care companies and restaurants, said Sinai.

An ageing population with an increasing propensity to eat away from home suggests those two categories could continue to add jobs in coming months, preventing payrolls from sending the telltale recession message, he said.

There is no doubt in my mind that we are into a recession-like economy, said Sinai in an interview. The technical definition of a recession may be out of date because the make-up of the economy has changed.

Consumer Spending

Another key area that has yet to issue any alarms is consumer spending, which accounts for more than two thirds of the economy. Spending figures in November were stronger than forecast even as gasoline hovered around $3 a gallon and property values slumped.

That leaves the onus on December retail sales figures, due from the Commerce Department on Jan. 15, to determine whether the American consumer will indeed falter.

We are spooked by this week's data and very open to a much weaker economic scenario, Stephen Stanley, chief U.S. economist at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in a note. A collapse in consumer spending last month would prompt him to carve up our forecasts for 2008 and start over with much weaker growth estimates, he said.

Today's jobs report also showed more industries were cutting payrolls than increased hiring last month. The so-called diffusion index dropped below 50, signaling contraction, for the first time since September 2003.

It's not a good situation, said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. It is certainly true that every time the unemployment rate has done what it did today, we are in a recession.

Still, I don't want to forecast a recession, he said, I would prefer for the National Bureau of Economic Research to call it a recession.

Source - Bloomberg