Northern Trust Global Economic Research

50 South LaSalle Chicago, Illinois 60603 northerntrust.com Asha Bangalore [email protected]

Unemployment Rate – Noteworthy Historical Details November 6, 2006

The 4.4% unemployment rate for October was a great headline supporting the case of optimists about the U.S. economy. But, the unemployment rate is a lagging indicator of economic conditions in any economy. The jobless rate is an indicator whose lows and highs are not coincident with the lows and highs of business cycles but the high of unemployment rate is almost always established after a recession. Chart 1 illustrates the history of the unemployment rate, shaded regions denote recessions. In other words, the 4.4% unemployment rate for October does not represent current economic conditions but reflects an economic situation that is part of history. Chart 1 Civilian Unemployment Rate: 16 yr + SA, % 12

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10

10

8

8

6

6

4

4

2

2 50 55 60 65 70 75 80 85 Sour ce: Bur eau of L abor Stati sti cs /Haver Anal yti cs

90

95

00

05

Table 1 lists the low for unemployment for business cycles since the 1960s. Table 2 lists the peak of the unemployment rate for each cycle. Table 1 – Low of unemployment rate for each business cycle 1960 – present Recession

Unem ploym ent rate - low for each business cycle

Com m ents

April 1960 - February 1961

4.8% , 2/1960

Low for unem ploym ent rate established 2 m onths prior to onset of recession

Decem ber 1969 -Novem ber 1970

3.4% , 9/1968 - 5/1969

Held between 3.5% and 3.7% until 12/1969

Novem ber 1973 - March 1975

4.6% , 10/1973

Low for unem ploym ent rate established 1 m onth prior to onset of recession

July 1981 - Novem ber 1982

7.2% , 4/1981

Low for unem ploym ent rate established 3 m onths prior to onset of recession

July 1990 - March 1991

5.0% in 3/1989, 5.2% in 6/1990

Held at 5.2% for six m onths between 4/1989 and 6/1990

March 2001 - Novem ber 2001

3.8% in 4/2000 and 3.9% in 12/2000

Held at 3.9% between 9/2000 and 12/2000

Current cycle

4.4% , 10/2006

Is this the low???

Of the six cycles listed, the unemployment rate is close to or at a cycle low just prior to the onset of a recession (see table 1). During the same six business cycles, the unemployment rate has established a high about 6-8 months after a trough of a business cycle (average is 8 months, median is 6 months). Of special note are the 1990s and 2001 recessions. Both these recessions were characterized by long periods of sideways movement around the cycle low of the unemployment rate just prior to a recession and the peak of the unemployment rate was established well after the onset of a recovery (15 months in the 1990s cycle and 19 months after the trough of the 2001 cycle). Therefore, optimists who are citing the low unemployment rate as an indicator of robust hiring may need to revisit historical data. Several other economic indicators -- real GDP growth, payrolls, housing market indicators such as starts, permits, sales, and residential investment expenditures -- are flashing convincing signals of significantly soft economic conditions. The Fed has held the federal funds rate unchanged at 5.25% since June 29, 2006. Table 2 – High of unemployment rate for each business cycle 1960 - present

James Pressler [email protected]

Recession

Unemployment rate - high for each business cycle

Comments

April 1960 - February 1961

7.1%, May 1961

Peak of unemployment rate 3 months after onset of recovery

December 1969 -November 1970

6.1%, August 1971

Peak of unemployment rate 9 months after onset of recovery

November 1973 - March 1975

9.0%, May 1975

Peak of unemployment rate 2 months after onset of recovery

July 1981 - November 1982

10.8%, November 1982

Peak of unemployment rate at the onset of recovery

July 1990 - March 1991

7.8%, June 1992

Peak of unemployment rate 15 months after onset of recovery

March 2001 - November 2001

6.3%, June 2003

Peak of unemployment rate 19 months after onset of recovery

Current cycle

???

South Korea: Next in Line For An Easing of Monetary Policy? Since mid-2005 nearly every major economy has gone through a cycle of monetary tightening, and the Bank of Korea (BoK) was no exception, increasing its overnight call rate (OCR) by 125 basis points to 4.50%. This is about in line with the average experiences seen throughout developing Southeast Asia, ranging between the 75 bps in rate hikes seen in Malaysia and the 150 bps of tightening seen in India over the past two years. On the extreme ends, Hong Kong and its US dollar-linked currency has endured 475 bps of tightening thanks to the US Fed, and Indonesia The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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has cut rates this year by two full percentage points, but the Korea experience seems to fall in line with the majority – until now. The OCR has remained at 4.50% since a quarter-point rate hike in August, and Korean central bankers have since stepped back from talk of further policy tightening – so far back that speculation is rising about the timing of the first cut. Some analysts argue that the BoK should act sooner rather than later on easing policy to mitigate the impact that North Korea is having on confidence, and others warn that weakening domestic demand will cause a significant economic deceleration by the start of 2007. Policy hawks point out that an inflated housing market (mostly urban) does not need the benefit of easier money right now, and that the talk of further rate hikes should not be dismissed so easily. Not an easy decision for the BoK. We recognize that there are pros and cons to both arguments, but at this point neither seems to have the gravity necessary to move the OCR in its favor. The cloud hanging over North Korea does make for eye-grabbing international news, but this is nothing above and beyond what South Korea has experienced in one form or another for the past 50-odd years. Anti-North protests rise, politicians combine their “Sunshine” policy statements with harsh rebukes of Pyongyang’s latest stunts, and life goes on. If anything, the latest outlook figures issued by the BoK suggest that despite all the cross-border rhetoric, prospects have been improving as far as businesses are concerned. It’s hard to argue that confidence is on the wane when the figures show just the opposite. Kor ea: BSI: Futur e Tendency: New Or der s Gr owth: Manufactur ing NSA, 100=neutr al

Kor ea: BSI: Futur e: Business Condition: All Industr ies NSA, 100=neutr al 97. 5

97. 5

90. 0

90. 0

82. 5

82. 5

75. 0

75. 0

67. 5

67. 5

60. 0

60. 0

52. 5

52. 5 04 05 Sour ce: Bank of Kor ea /Haver Analytics

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The economic slowdown argument does not quite pass muster with us either. GDP growth has slowed to a quarterly annualized rate of 3.7% in Q3, closer to the low of 1.9% seen in Q3 2004 and far from the more robust 6.7% rate posted at the end of Q4 2005. However, the quarterly rates of private consumption growth and, more telling, of private fixed investment remain in good shape (albeit somewhat volatile), and well above the lull in 2004. The current slowdown is not showing symptoms of something more severe. The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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Kor ea: Real GDP: Final Consumption Expenditur e % Change - Annual Rate

SA, Bil. 2000. Won

Kor ea: Real GDP: Gr oss Fixed Capital For mation % Change - Annual Rate

SA, Bil. 2000. Won

16

16

12

12

8

8

4

4

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0

-4

-4

-8

-8 04

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06

Sour ce: Bank of Kor ea /Haver Analytics

The hawks do have a point about the inflated real estate market – at least in the Seoul region – but the call for tightening seems premature. In the larger picture, both headline and core CPI growth have accelerated somewhat from recent lows, but they remain beneath levels exhibited at the beginning of 2005 and there is still the impact of the Q2 and Q3 rate hikes to consider. The recent retreat in oil prices is another contributor to the argument that the BoK does not have to keep with the regional trend of higher rates. Kor ea: CPI: All Items % Change - Year to Year

NSA, 2000=100

Kor ea: CPI: All Items excluding Agr icultur al Pr oducts & Oil % Change - Year to Year

NSA, 2000=100

5. 25

5. 25

4. 50

4. 50

3. 75

3. 75

3. 00

3. 00

2. 25

2. 25

1. 50

1. 50 04

05

06

Sour ce: National Statistics Office /Haver Analytics

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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We have penciled in a neutral policy stance by the BoK through Q1 2007, with cautious eyes watching for deteriorating economic conditions. During this time some other Asian economies may also switch to a neutral stance, but for all intents and purposes, the BoK has already made the decision, and by Q2 of next year it could be the next country in the region to cut rates.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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