Depression Fatigue?

I wrote over the summer about the manic consumer mood during recessions. My argument then was that by calling a recession, policymakers could send consumer confidence into a tailspin.

With the current recession creeping toward it's second full year (even if NBER calls June the end of the downturn, as some predict, that will make the recession 18 months), this is the longest contraction since the Great Depression. Calling a recessions is academic for this instance. Today, I want to know what happens in long recessions. The figure below charts the unemployment rate (the BLS' headline U-3) and the ICS (the University of Michigan and Reuters confidence index that I used before.The model that I provide is hyperbolic, allowing it to take the curved shape in the blue regression line. The model, which accurately predicts the current ICS from the September unemployment rate, indicates that small changes in the unemployment rate drag on confidence more than at high levels.


The model is far from perfect because unemployment is one of the last indicators to recover form a recession. Yet unemployment tends to peak at the end, or just after the end of a recession. So we can use high unemployment levels as as a proxy for the length of a recession.

People appear to be most respond emotionally to the beginning of a contraction. We're seeing this now. Chairman Bernanke called the recession "officially over" recently and the Fed said in it's FOMC statement yesterday that consumer spending is "expanding."


Oh for the wonks, the model specificaiton is:
ICS=187 (1/unemployment rate)+54
R2=.25
*The model outperforms ln, linear, or quadradic specifications
Data from 1978 to present

Consumer Confidence Falters

After rising for four straight months, the preliminary July confidence figure from the University of Michigan and Reuters delinted. While we won't get the final measure for two more weeks, the index fell more than 6 points and will definitely be lower than June even with potential revision.

I wrote previously about the increased volatility in this measure and how announcing a "recession" causes it to spiral downward. If we look at volatility than the previous four months are encouraging. The last time the index rose for four straight months was as the 2001 recession ended. There was a fall then but much less than today. Furthermore, the decline in this recession has been much more dramatic and will likely still take quite some time to recover to pre-recession levels.

Fearing the R-word

Among elected officials, there is rarely a desire to be the first to use the "R-word": Recession. While the word does not evoke the same fear of breadlines and shantytowns that Americans have been trained to associate with a Depression, the term still reminds people of slim times and cutting-back.

Friday the University of Michigan and Reuters released their headline confidence index: the Index of Consumer Sentiment. The measure tracks how people feel about the economy at any given time. The index sat at a

bout 80 points just before the current recession began in December of 2007. Since then it feel to a low of  55.3, a level unseen since 1980.

Confidence is beginning to recover, reaching 69 points in the preliminary June estimate. This good humor comes even as unemployment continues to rise and economists tell us that Americans have "lost their spirit."

Yet more interesting than the immediate swing in confidence is the increased variation when we do enter recessions. Beginning in the 1980s, peoples confidence became markedly different during recessions (as timed by the NBER) then during the rest of the business cycle.

The chart below gives the average level of consumer confidence by decade. It then provides decade-long averages for both recessionary and non-recessionary periods. Starting in the 1980s the gap in confidence between recessions and the rest of the business cycle becomes stark. While the current recession has been deep, the 1990's and even early 200s saw mild recessions associated with large deterioration in confidence. Consumers look more manic than they once did.

Source: Author's calculations, University of Michigan/Reuters Index of Consumer Sentiment, National Bureau of Economic Research Business Cycle Dating

Unemployment Rises to 8.9 percent

The Bureau of Labor Statistics released the unemployment rate for April today. It's estimated at 8.9 percent of the labor force, an increase from 8.5 percent in March. This is moth a slower job loss than last month and not much of a surprise. I wanted to point out two quick things.

1. The "rosey" assumptions in the Obama FY2010 Budget look more unrealistic with time. Below I've charted the US unemployment rate so far this year along with projections needed to match the average unemployment rates predicted in the budget (8.1 percent) and by CBO (8.3) back in January.

The figure assumes that unemployment declines at a constant rate each month to reach the average. Already unemployment would have to decline by .2 percentage points a month to 7.3 percent by year's end to meet the budget's annual average. Yet the administration projects an average of 7.9 percent unemployment in 2010. So it's going to take some wild gyrations in unemployment to get these results. I've dismissed these assumptions before but the numbers, for unemployment at least, continue to underscore just how off they were.

2. I'm glad to see that BLS gave attention to something I've blogged about previously, the growth of discouraged workers. The chart below from BLS show that discouraged and marginally attached workers have grown during this recession.