Recovery: What if economists are wrong?

The writer could not have been more absolute in his opinion: “Unemployment is certain to remain high in the period ahead."

When that line appeared in the pages of this newspaper in October, 1983, unemployment had already peaked. Over the next three years, the rate dropped as the Canadian economy produced nearly a million new jobs.

Over the next five, the ranks of the jobless fell by about 350,000. That's what being “certain" gets you. Around the same time, the Conference Board of Canada glumly warned that the country was so messed up it was bound to see sluggish growth for most of the 1980s.

What really happened, of course, was the opposite: a smoking-hot expansion. By the decade's end, acute optimism had set in. “[T]he economy is easing its way toward a soft landing," cooed The Globe in 1989, echoing the predictions of the finance minister, economists and, yes, the Conference Board. It was a landing, all right – the kind where you hurt your backside.

When it comes to economics and finance, the human mind is a fascinating but flawed thing. Time and again we discover that the majority view is way off the mark, even 180 degrees off. But very few ever absorb the lesson. So the cycle turns, a new consensus is built, and we believe it, yet again.

In that context, let's consider the possibility that the Bay Street economic droids – now shouting in near-unison about the risk of a tepid, cheerless, jobless recovery – just might have it wrong, yet again.

Yeah, we know: The numbers are all bad, the once-mighty Canadian jobs machine is sputtering before it really got restarted, and the U.S. unemployment rate is now 10.2 per cent, its highest since 1983 – there's that year again. But the unemployment rate is no better a predictor of the future now than it was back then. It's a lagging indicator.

At this point we bring in Dan Gertner, an analyst with Grant's Interest Rate Observer , a publication much revered (particularly among value investors) for its willingness to take the consensus view and stuff it down a garbage chute.

Examining the numbers from every recession since 1948, Mr. Gertner sliced the data into categories – the newly unemployed, those who've been without work at least five weeks, and so on.

What he found was a common pattern of recoveries. First, the number of new unemployed begins to decline; that usually happens just as the recession is ending (and is happening right now). The legions of longer-term unemployed begin to shrink about six months later. This, Mr. Gertner wrote, makes “perfect sense": Companies stop firing people, then pause to see if growth takes hold before they actually start rehiring.

In the so-called “jobless recoveries" of the early 1990s and the early 2000s, it took far longer for the cohort of long-term unemployed to get smaller. If you were out of work for several months, you could easily find yourself out of work for two years. That's why Jean Chrétien's Liberals could campaign and win in late 1993 on “Jobs, jobs, jobs," even though the recession of 1990-91 was already ancient history.

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