05 December 2015

Comparing the Surprisingly Similar Recoveries of the 1980s and 2010s

As it turns out, the recovery since 2010 is fairly similar to the recovery between 1982 and 1989.

In 2010 and 1982, unemployment rates were nearly identical (9.6% and 9.7% respectively). Those years represented the peak unemployment rate for that recession. During this decade's recovery, it took 5 years for unemployment to drop from its peak to 5.3%.  During the 1980s, it took 7 years for unemployment to hit 5.3%.

It is true, though, that this recovery is lowering the unemployment rate faster than it is creating jobs. Five years in, the 1980s and 2010s recovery had created roughly the same number of jobs: 12.9 million in the 1980s and 13.3 million in this decade.

This suggests that as people come back into the job market during the next couple of years, unemployment won't drop at the same rate that it has for the first five years of this recovery. That is, even if we keep creating 2 to 3 million jobs a year, the unemployment rate is unlikely to keep dropping by more than 0.5 percentage point a year.

The stock market did better in the 1980s. Through the first five years of that recovery, stocks were up 114%, and rose a total of 186% by 1989. By contrast, five years in the S&P 500 is up 95% (and of course that could change by 1 to 6% in either direction before December 31). The suggestion from this (simplistic comparison) is that markets still have room to rise over the next couple of years.

These simple measures suggest that this recovery is not so very different from the recovery of the 1980s, playing out over roughly the same time frame to largely the same effect. We've lowered unemployment faster than in the 1980s but because people are dropping out of the job market faster, not because we're creating jobs faster. 

And on that note, for whatever reason, people seem to be leaving work more rapidly than they're losing work, as can be seen in this graph below. It could be as simple as baby boomers retiring. It might be the rise of "free agents," folks like Uber drivers and Makers who don't count as entrepreneurs or employees. It might be a rise in education levels (people leaving the work force for degrees) or stay-at-home parents. In any case, people are still leaving the workforce even as layoffs are slowing.

Finally, the great news is that this recovery still shows no signs of stalling. Not yet. Our streak of uninterrupted months of job creation is now at 62 months and counting (the old record was 48 months). Next year could be the best year yet of this recovery and in 1989, unemployment of 5.3% represented the best it would get until 1997. By contrast, unemployment will likely stay below 5.0% all of next year. At year 7, the recovery of the 1980s was stalling. At year 5, this recovery still has steam left. Or, to update to a more contemporary metaphor, there is still charge left in this battery. 

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