Does Unemployment Guide the Stock Market?

Conventional wisdom holds that stock prices are leading indicators of economic health, while unemployment figures are lagging indicators. This makes sense, because stock prices reflect real-time valuations of company health, whereas employers don't make the decision to downsize (or restaff) until they feel like they've got a sense of long-term recession or growth. But along comes Felix Salmon with a graph to blow up that whole theory:

First, here's the graph he tracks down, which seems to indicate that stock prices and unemployment have held hands this recession.

My first thought was: Well, maybe improved information technology made employers more sensitive to this downturn. So I went to the Bureau of Labor Statistics to check out unemployment trends, and here's the unemployment graph over the last three decades:

You can see the four big unemployment spikes are: after 74, after 82, after 91, and after 2001.  But what happens when you compare unemployment spikes to corresponding stock market troughs? Does Salmon's theory hold that unemployment spikes mark the the beginning of long-term stock rallies? Let's see.


In the recession that began in 1974, unemployment figures peaked in early 1975, a few months after the stock market bottomed out in December, 1974. Conclusion: Unemployment peak was a lagging, but not too lagging, indicator of long-term stock rally.

In the recession that defined Reagan's first year-plus, unemployment peaked in the last quarter of 1982. Similarly the stock market saw the bottom in August 1982. Conclusion: Once again, the peak of unemployment occurred a few months after the bottom of the stock market.

In the recession that swept Clinton into office, unemployment's ceiling occurred during the campaign in the summer of 1992, more than a year and a half after the stock market began to climb from its October 1990 bottom. Conclusion: Unemployment really lagged stock growth in the early 1990s.

What can we take away from these graphs? Salmon's theory does not seem to hold over the last three decades. The peak of unemployment often comes around a quarter after the stock market turns up, which seems to me to validate its reputation as a lagging indicator. The good news, however, is that in this downturn, the stock market rebounded in early March, which would suggest, historically, that unemployment could peak in early summer. Let's just hope, for the sake of the unemployed, that this isn't 1991 redux.

This article available online at:

http://www.theatlantic.com/business/archive/2009/05/does-unemployment-guide-the-stock-market/18306/