Job Recovery Cycle Intact - TheStreet

Job Recovery Cycle Intact

In spite of all the hand wringing about how slowly jobs will recover, we are proceeding exactly as would be expected, based on historical precedent.
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There are reasons that unemployment will remain a persistent problem for many years, but the rate of job loss is not one of those problems at this point.

The Labor Department's unemployment claims report shows that the 4-week moving average increased for the second consecutive week. This is the first rise since August and only the second up-move since the claims peaked on April 4, 2009. However, this is no cause for alarm.

The weekly initial unemployment claims data are still following the track of similar recoveries in the past 50 years. The WIUC report showed a seasonally adjusted number of 470,000 (advanced), down from 478,000 (revised) for the week of January 16. The less volatile 4-week moving average rose to 456,200. This was more than 15,000 higher than the low (440,750) reached for the week ending January 9.

The historical record of WIUC is shown in the following graph.

The behavior of WIUC in seven recessions, included in the above graph, shows two characteristic groups: broad and sharp peaks. Broad peaks do not decline to less than 67% of peak value within 18 months. The current recession has not quite reached the 67% criteria, but is close enough after 42 weeks to expect it will be reached within the next 36 weeks.

The 67% level is at 439,000. This is not the level at which job growth is expected to become positive. The general bench mark for that to happen is for WIUC to fall to about 400,000. Significant job growth is not expected until the level falls below 400,000 and stays there.

The following graph looks at the shape of the decline curves from WIUC peaks for each of the most recent recessions.

The declines after 42 weeks fall into two groups. The slow group has declines in the area of 10% to 20%. The fast group is from 30% to 40% below the peak.

The following table classifies the declines from peak WIUC into four types.

All four peaks classified as sharp were showing a fast rate of decline after the first 42 weeks, while the three broad peaks were all slow to decline in the same first weeks. The four sharp/fast peaks fall into two volatility types: medium and low, whereas the three broad/slow peaks where at either high or medium volatility.

The current recession falls into the same classification (Type 3) as the recessions of 1973-1975 and 1981-1982. These two earlier recessions are considered to be the most severe of the last 50 years. The current recession is considered to be at least as severe as the other two fitting this characterization of WIUC.

In spite of all the hand wringing about how slowly jobs will recover following this recession, the early phases of recovery, as reflected by WIUC, are proceeding exactly as would be expected, based on historical precedent.

Other factors are different in this recession, including (1) the unprecedented duration of unemployment and (2) the high percentage if permanent job loss among the unemployed. But the nature of further new job losses is tracking true to form.

It remains to be seen if the problems mentioned will cause the behavior of unemployment claims to deviate from the previous sharp/fast cycles in the coming months and inhibit the return to significant job growth. However, so far this employment recovery cycle is following the script.

John B. Lounsbury is a financial planner and investment adviser, providing comprehensive financial planning and investment advisory services to a select group of families on a fee-only basis. He worked for 34 years with IBM, and spent 25 years in R&D management and corporate staff positions. He also was a Series 6, 7, 63 licensed representative with a major insurance company brokerage for nine years.

Specific interests include political and economic history and investment strategy analysis. He holds degrees from the University of Vermont, Columbia University and the Illinois Institute of Technology, where he studied chemistry, physics and mathematics. He is a contributor to Seeking Alpha and his own blog,