Unemployment, Inflation, and the Economy

Introduction

Hi everyone, I hope you’re enjoying your Saturday. This week has proven to be a whirlwind of good and bad earnings across some of the most popular companies in the US.

Those of you that subscribe to the Rate of Return newsletter should expect a detailed walkthrough of the most important earnings releases in tomorrow’s edition of Week in Review.

In this post, we’ll talk about

• Historic unemployment trends in relation to inflation

• Layoffs we’re seeing across the country

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Unemployment and Inflation

Let me start by saying this — history does not always repeat itself. 

It would be incredibly irresponsible of me to blatantly ignore that inflation this go-around was mainly caused by supply chain issues as the world continued to navigate life post-COVID. These reasons are wildly different from past high-inflation eras.

Inflation = increase in prices.

Prices = supply and demand.

Over the last several months we’ve seen heightened demand paired with restricted supply, causing higher prices — aka inflation.

With that being said, the Federal Reserve’s main objective right now is to lower inflation — period, end of story.

And we’re seeing that statement in action.

Below is an image that illustrates just how quickly the Federal Reserve is raising interest rates vs. historical instances. It also displays (yellow) the historical tightening cycles that ended in a recession.

Since 1948, there have been 4 instances where inflation was about 8% (where we are today) — 1948, 1951, 1973, and 1978.

Weirdly enough, during every single one of these historical instances for this sky-high inflation to subside not only did we have to enter into a recession, but the unemployment rate had to skyrocket above 6%.

Unemployment rate by year:

• 1948 — 7.9%

• 1951 — 6.1%

• 1973 — 9.0%

• 1978 —9.4%

Right now, the unemployment rate is 3.6% — far below this historical 6% “benchmark” figure.

I want to again be very clear, today’s inflation was mainly caused from the supply side — not the historical demand side. The Federal Reserve raising interest rates impacts the demand side, not the supply side.

But does that mean we won’t see an increase in unemployment?

It’s hard to say, but we’ve certainly begun to see unemployment momentum across the country..

Year-to-Date Layoffs Across the Country

A wonderful resource to help you keep tabs on the continual layoffs occurring across the country is layoffs.fyi — sharing the name of the company, percentage of total workforce, etc.

July Layoffs

Despite the stock market trading up throughout the month of July, it’s still our humble opinion things are going to get worse before they get better. I’m not sure if completely crushing consumer demand (recession / high unemployment) is needed to curb inflation given its supply-side problems — but I do believe hiking interest rates incredibly fast like we’ve done over the last few months is only beginning to cause ripple effects throughout the economy.

I think we’ll really see the impact of higher rates in Q4 of 2022 and Q1 of 2023.

Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.