Why Not the R-Word?

This column was originally published on RealMoney on Aug. 31 at 3:02 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Last spring, with oil spiking to $60 a barrel, many market pundits were confident of a sharp second-half slowdown, and possibly a recession. But the widely feared downturn didn't materialize. Rather, in line with ECRI's forecast back in May that "U.S. economic growth will hold up in the second half of 2005," the economy has continued to see decent growth.

It's not that oil prices can't trigger a recession until they breach the inflation-adjusted record highs seen a quarter century ago: It's absurd to believe that's a magic threshold. Nor does it help much for the U.S. to be less energy-intensive than in the 1970s. That was already true five years ago, when, as predicted, $37 oil triggered an oil recession.

In fact, when ECRI's array of leading indices points to a vulnerable economy, almost any significant shock can spark a recession. When those leading indices, such as the Weekly Leading Index, or WLI, show a resilient economy, few major shocks can derail an expansion. That was certainly true last spring, and remains true today.

But in retrospect, what helped to make the economy so resilient? An answer comes from an unexpected quarter.

Insights From a Lagging Indicator

Less than three years after the start of the 2001 recession, a structural tsunami had swept away three million U.S. manufacturing jobs. Many of those who lost jobs ended up in the ranks of the long-term unemployed, causing a sustained upswing in the average duration of unemployment and the long-term jobless rate. (See chart, which shows them inverted, because a downturn in these indicators is good for the economy.)

Historically, the long-term (over six months) jobless rate starts improving just after the end of a recession (second line on chart). The lag clearly increased after the 1990-91 recession as a wave of downsizing hit the economy, and rose even further after the 2001 recession, as long-term unemployment kept rising for about two years after it ended.

The same was true for the jobless rate between 15 weeks and 26 weeks (third line), but not as much for the jobless rate between five weeks and 14 weeks (fourth line), and even less so for the short-term (under five weeks) jobless rate (bottom line). In fact, the latter increased far less during the 2001 recession than in the severe recessions of the mid-1970s and early 1980s.

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Source: ECRI