Monday, October 5, 2009

Mr. Greenspan's "Prediction" and The Media

In an interview Alan Greenspan gave on one of the Sunday morning TV shows, he made the comment that he "suspects" that the unemployment rate will rise above 10% and stay there for a while before it subsequently starts coming down.


This was actually a comment devoid of any insightful content. Mr. Greenspan simply stated something that is widely acknowledged as an extremely high probability outcome (bordering on self-evident) at this point, that is, that the unemployment rate- already at 9.8%- is poised to cross the 10% mark in the foreseeable future.

The unemployment rate is a lagging indicator and the past pattern of its behavior shows a strong tendency of it peaking, by a varying lag, after the end of a recession. The reason for that is that with the first signs of improvement that emerge toward the beginning of an economic recovery, previously discouraged workers that had dropped out of the labor force are coming back, therefore swelling the size of the labor force faster than the pace at which the economy can absorb them.

For example, in the 2001 recession, the rate did not peak until 19 months after its official end, while in the 1990-91 recession, it peaked 15 months after it ended. The 1981-82 recession was somewhat of an exception, as there was a synchronized peak of the unemployment rate with the trough of the business cycle in November 1982. In the highly peculiar recession of 1980, the peak in the rate also coincided with the low point of that unusual cycle. The 1973-75 recession led to a peak in the unemployment rate just a couple of months after its end.

The reason for which, in some cases, the rate has peaked almost simultaneously with the trough in economic activity is that the economy came roaring back at very robust rates of GDP growth (5%, 6% or higher, in the first year of the recovery), allowing it to absorb fully the workers re-entering the labor force. It has already been established that, given the array of headwinds at work, this recovery is not likely to be of sufficient vigor to generate enough jobs early on to prevent the rate from rising.

Mr. Greenspan certainly understands all of that extremely well, as he has always been a diligent student of economic history. In fairness to him, he most likely, did not even think he was making a particularly novel prediction by saying that the unemployment rate will rise above 10%. (True, he used a particularly cautious tone "My own suspicion is that we're going to penetrate the 10% barrier and stay there for a while...", but this can be chalked up to his many years of having perfected a unique brand of impressively careful and convoluted statements, which he evidently has a hard time shedding now).

The somewhat amusing thing is not as much that Mr. Greenspan offered that bland observation about the direction of the unemployment rate, but that his comment has received quite a bit of play in the media in the last 24 hours, financial and otherwise, with headlines of the kind "Alan Greenspan predicts that the unemployment rate will rise to 10%" etc. One simply has to assume that, given the transparent banality of Mr. Greenspan's so-called "forecast", the media either did not recognize that as such or it has been a particularly slow news cycle this weekend that sent them to a desperate search for a "headline".

Anthony Karydakis

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