Chart of the day: Stocks vs unemployment

By Felix Salmon
May 25, 2009
Received opinion has it that stock prices are a leading indicator of economic conditions -- they price in expected future events -- while the unemployment rate is a lagging indicator, since it reflects the outcome of decisions made in the past, and businesses only just beginning to come out of a recession are generally hesitant to start hiring again. Looking at this graph, however, it seems that the two indicators are much more coincident than you might think, and it's pretty hard to look at that uptick in stock prices over the past couple of months and see compelling evidence of "green shoots". " data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

sp_vs_u6.gif

Received opinion has it that stock prices are a leading indicator of economic conditions — they price in expected future events — while the unemployment rate is a lagging indicator, since it reflects the outcome of decisions made in the past, and businesses only just beginning to come out of a recession are generally hesitant to start hiring again.

Looking at this graph, however, it seems that the two indicators are much more coincident than you might think, and it’s pretty hard to look at that uptick in stock prices over the past couple of months and see compelling evidence of “green shoots”. Especially given the absolute magnitude of the unemployment rate, which is now so high that it’s seriously hurting consumption.

If and when the recovery does take place, we won’t just move cyclically back into a period reminiscent of the last boom. Rather, the new economy will look very different from the old economy: it will be much less reliant on personal consumption expenditures than before, and especially on expenditures which were financed by debt, be it on credit cards or the proceeds of home equity withdrawals.

A glance at the chart shows that stock prices are very volatile these days, and that you extrapolate from short-term countertrends at your peril. It’s the red line which really charts the state of the economy, not the blue line. And although there’s the vaguest hint of a suggestion that the red line might just be leveling off, it’s worth remembering that it’s pretty hard to paint a picture of economic recovery with the unemployment rate at current levels.

When unemployment starts to drop — then, and only then, will I start to believe that a rising stock market might be telling me something. Of course, I’m not a stock-market speculator, so I’m not worried about missing out on the market rising further — in fact I’d love to see stocks roar upwards, and the attendant inrush of liquidity help to kick-start the economy. But I’m not holding my breath.

(Update: The chart shows U6 underemployment, which is a broad measure of the number of people looking for more work than they have right now. But just about any of the unemployment ratios would show much the same thing.)

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