The unemployment rate has been spiking recently and although the acceleration has been fairly dramatic, now unequivocally signaling contraction and recession, the real question remains… how bad will things get?To roughly answer this question I used a relationship between private non-farm payrolls (adjusted for population), initial unemployment claims and the unemployment rate to build a simple predictive model.
First note that on the chart below the reddish bands demark periods of spiking unemployment and although the extent of the bands do not exactly correlate with recession, the start of every band DOES match the start of each recession including the presumed recession that started this December 2007 or January 2008.
The end of each band correlates with the peak in the unemployment rate for that cycle.
Also notice that the peak in the unemployment rate correlates almost exactly with the trough in the non-farm payroll decline while the initial unemployment claims series correlates well with the main expansion in unemployment but usually peaks prior to the unemployment rate peak.
On average, private non-farm payrolls (adjusted for population) have declined 4.4% from the start of each of the last six recessions to the trough of the payroll decline while the unemployment rate increases by 59.85% over the same period resulting in a ratio of -1%:13.6% (non-farm payrolls to the unemployment rate).
So if the current spike in unemployment were to run an average course of 60% then the rate would top out at around 8% … BUT… given that we have already experienced roughly a 16% increase in unemployment from that start of the presumed recession and only a 0.85% decline to private non-farm payrolls, things are looking worse than average (-1%:18.82%)
It’s very possible that there will be an 80% to 100% overall increase in unemployment rather than the average 60% which would result in a rate of roughly 9-10%.
10% unemployment hasn’t been seen in the U.S. for some time.Many workers, especially service industry professionals, haven’t ever experienced a job market worse than 6.3 – 7.4% unemployment.
