Markets in a Minute
Charted: Unemployment and Recessions Over 70 Years
This infographic is available as a poster.
This infographic is available as a poster.
Charting Unemployment and Recessions Over 70 Years
As of August 2022, the U.S. unemployment rate sits at 3.7%, below its 74-year average of 5.5%.
Why does this matter today? Employment factors heavily into whether economists determine the country is in a recession. In fact, in the last several decades, employment-related factors have some of the heaviest weightings when a recession determination is made.
In this Markets in a Minute from New York Life Investments, we look at unemployment and recessions since 1948.
Why Is the Unemployment Rate Important?
To start, let’s look at how unemployment affects the economy.
During low unemployment and a strong labor market, wages often increase. This is a central concern to the Federal Reserve as higher wages could spur more spending and notch up inflation.
To curb inflation, the central bank may increase interest rates. As the economy begins to feel the effects of rising interest rates, it may fall into a recession as the cost of capital increases and consumer spending slows.
Who Determines It’s a Recession?
A committee of eight economists at the National Bureau of Economic Research (NBER) in Massachusetts make the call, although often several months after a recession has happened. As a result, employment data often acts as a lagging indicator.
This committee of academics looks at a number of variables beyond two consecutive quarters of negative GDP growth. Other factors include:
- Nonfarm payroll employment
- Real personal income less transfers
- Real personal consumption expenditures
- Industrial production
- Wholesale retail sales adjusted for price changes
- Real GDP
A widespread decline in economic activity across the economy, as opposed to just one sector, is also considered.
Unemployment and Recessions Over History
Over the last 12 business cycles, the unemployment rate averaged 4.7% at the peak and 8.1% during the trough. The below table shows how the unemployment rate changed over various U.S. business cycles, with data from NBER:
| Peak Month | Unemployment Rate | Trough Month | Unemployment Rate |
|---|---|---|---|
| Nov 1948 | 3.8% | Oct 1949 | 7.9% |
| Jul 1953 | 2.6% | May 1954 | 5.9% |
| Aug 1957 | 4.1% | Apr 1958 | 7.4% |
| Apr 1960 | 5.2% | Feb 1961 | 6.9% |
| Dec 1969 | 3.5% | Nov 1970 | 5.9% |
| Nov 1973 | 4.8% | Mar 1975 | 8.6% |
| Jan 1980 | 6.3% | Jul 1980 | 7.8% |
| Jul 1981 | 7.2% | Nov 1982 | 10.8% |
| Jul 1990 | 5.5% | Mar 1991 | 6.8% |
| Mar 2001 | 4.3% | Nov 2001 | 5.5% |
| Dec 2007 | 5.0% | Jun 2009 | 9.5% |
| Feb 2020 | 3.5% | Apr 2020 | 14.7% |
In 1953, following post-WWII expansion, the unemployment rate fell to 2.6%, near record lows.
During this time, the economy faced strong consumer demand and high inflation after a period of prolonged low interest rates. To combat price pressures, the Federal Reserve increased interest rates in 1954, and the economy fell into recession. By May 1954, the unemployment rate more than doubled.
In 1981, the unemployment rate was high during both the peak of the cycle (7.2%) and the trough (10.8%) by late 1982. This marked the end of the 1970s stagflationary era, characterized by slow growth and high unemployment.
More recently, at the peak of the business cycle in 2020 the unemployment rate stood at 3.5%, closer to levels seen today.
Unemployment Today: A Double-Edged Sword
As of July 2022, the number of job vacancies is at 11.2 million, near record highs.
To reign in the inflationary pressures of the current job market—which saw year-over-year wage increases of 5.2% in both July and August—the Federal Reserve may take a more aggressive stance on interest rate hikes.
The good news is that labor force participation is increasing. As of August, labor force participation was within 1% of pre-pandemic levels, offering relief to the labor market supply. Higher labor force participation could lessen wage growth without unemployment levels having to rise. Since more people are competing for jobs, there is less leverage for salary negotiation.
Going further, one study shows that since the Great Financial Crisis, labor market participation has had a greater influence on wage growth than unemployment levels or job openings.
Against these opposing forces of higher job vacancies and higher labor market participation, the outlook for unemployment, along with its wider effects on the economy, remain unclear.
Markets in a Minute
The Average American’s Financial Portfolio by Account Type
From retirement plans to bank accounts, we show the percentage of an American’s financial portfolio that is typically held in each account.
The Average American’s Financial Portfolio by Account Type
Where does the average American put their money? From retirement plans to banks, the typical financial portfolio includes a variety of accounts.
In this graphic from Morningstar, we explore what percentage of a person’s money is typically held within each account.
Breaking Down a Typical Financial Portfolio
People put the most money in employer retirement plans, which make up nearly two-fifths of the average financial portfolio. Bank accounts, which include checking, savings, and CDs, hold the second-largest percentage of people’s money.
| Account Type | % of Financial Portfolio |
|---|---|
| Employer retirement plan | 38% |
| Bank account | 23% |
| Brokerage/investment account | 14% |
| Traditional IRA | 10% |
| Roth IRA | 7% |
| Crypto wallet/account | 4% |
| Education savings account | 3% |
| Other | 1% |
Source: Morningstar Voice of the Investor Report 2024, based on 1,261 U.S. respondents.
Outside of employer retirement plans and bank accounts, the average American keeps nearly 40% of their money in accounts that advisors typically help manage. For instance, people also hold a large portion of their assets in investment accounts and IRAs.
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Account Insight for Advisors
Given the large focus on retirement accounts in financial portfolios, advisors can clearly communicate how they will help investors achieve their retirement goals. Notably, Americans say that funding retirement accounts is a top financial goal in the next three years (39% of people), second only to reducing debt (40%).
Americans also say that building an emergency fund is one of their financial goals (35%), which can be supported by the money they hold in bank accounts. However, it can be helpful for advisors to educate clients on the lower return potential of savings accounts and CDs. In comparison, advisors can highlight that investment or retirement accounts can hold assets with more potential for building wealth, like mutual funds or ETFs. With this knowledge in mind, clients will be better able to balance short-term and long-term financial goals.
The survey results also highlight the importance of advisors staying up to date on emerging trends and products. People hold 4% of their money in crypto accounts on average, and nearly a quarter of people said they hold crypto assets like bitcoin. Advisors who educate themselves on these assets can more effectively answer investors’ questions.
Markets in a Minute
5 Factors Linked to Higher Investor Engagement
Engaged investors review their goals often and are more involved in decisions, but which factors are tied to higher investor engagement?
5 Factors Linked to Higher Investor Engagement
Imagine two investors. One investor reviews their investment goals every quarter and actively makes decisions. The second investor hasn’t reviewed their goals in over a year and doesn’t take part in any investment decisions. Are there traits that the first, more involved investor would be more likely to have?
In this graphic from Morningstar, we explore five factors that are associated with high investor engagement.
Influences on Investor Engagement
Morningstar scores their Investor Engagement Index from a low of zero to a high of 100, which indicates full engagement. In their survey, they discovered five traits that are tied to higher average engagement levels among investors.
| Factor | Investor Engagement Index Score (Max = 100) |
|---|---|
| Financial advisor relationship | Don’t work with financial advisor: 63 |
| Work with financial advisor: 70 | |
| Sustainability alignment | No actions/alignment: 63 |
| Some/full alignment: 74 | |
| Trust in AI | Low trust: 61 |
| High trust: 74 | |
| Risk tolerance | Conservative: 62 |
| Aggressive: 76 | |
| Comfort making investment decisions | Low comfort: 42 |
| High comfort: 76 |
Morningstar’s Investor Engagement Index is equally weighted based on retail investors’ responses to seven questions: feeling informed about composition and performance of investments, frequency of investment portfolio review, involvement in investment decision-making, understanding of investment concepts and financial markets, frequency of goals review, clarity of investment strategy aligning to long-term goals, and frequency of engagement in financial education activities.
On average, people who work with financial advisors, have sustainability alignment, trust AI, and have a high risk tolerance are more engaged.
The starkest contrast was that people with high comfort making investment decisions have engagement levels that are nearly two times higher than those with low comfort. In fact, people with a high comfort level were significantly more likely to say they were knowledgeable about the composition and performance of their investments (84%) vs. those with low comfort (18%).
Personalizing Experiences Based on Engagement
Advisors can consider adjusting their approach depending on an investor’s engagement level. For example, if a client has an aggressive risk tolerance this may indicate the client is more engaged. Based on this, the advisor could check if the client would prefer more frequent portfolio reviews.
On the other hand, soft skills can play a key role for those who are less engaged. People with low comfort making investment decisions indicated that the top ways their financial advisor provides value is through optimizing for growth and risk management (62%), making them feel more secure about their financial future (38%), and offering peace of mind and relief from the stress of money management (30%).
A New Framework for Personalized Financial Portfolio Alignment
The Average American’s Financial Portfolio by Account Type
5 Factors Linked to Higher Investor Engagement
The Top 5 Reasons Clients Fire a Financial Advisor
The Top 5 Reasons Clients Hire a Financial Advisor
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