The Downturn Worsens: Would Ed Leamer Agree We're in a Recession Now?

UCLA Professor Ed Leamer recently proposed four criteria for determining whether the economy is in recession, and concluded at the time of his study (two months ago) that the U.S. had not yet crossed that threshold. But this week's data might cause him to change his mind.

Professor Leamer observed that recessions are usually characterized by a 6-month drop in civilian employment of more than 0.4% as measured by the BLS household survey. At the time he wrote his paper, the U.S. fell just short of that standard. But the BLS reported on Friday that this measure fell by 222,000 jobs in September, putting the 6-month change at -0.5%. On the basis of this number, Leamer would now have to change his call.

100 times the 6-month change in natural log of civilian employment, from FRED, with NBER recessions as shaded regions and dashed line at -0.4 threshold.

Leamer further suggested that a 6-month change in the unemployment rate of more than 0.8 percentage points also signals a recession. Although the BLS reported on Friday that the unemployment rate held steady in September at 6.1%, the sharp increase during July and August had already shot us well past Leamer's threshold for a recession.

The 6-month change in civilian unemployment rate, from FRED, with NBER recessions as shaded regions and dashed line at +0.8 threshold.

Leamer also noted that it's typically called a recession if the 6-month growth rate of nonfarm payroll employment falls below -0.5%. September's NFP drop of 159,000 workers leaves us just short of that cutoff, with the 6-month change standing at -0.4%. Feel better now?

100 times the 6-month change in natural log of seasonally adjusted nonfarm payroll employment, from FRED, with NBER recessions as shaded regions and dashed line at -0.5% threshold.

I don't. I prefer to look at whether the 12-month growth rate is negative, as it has now clearly become.

100 times the 12-month change in natural log of seasonally adjusted nonfarm payroll employment, from FRED, with NBER recessions as shaded regions and dashed line at 0.0 threshold.

Since the employment numbers are subject to lots of revision, it's worth noting that calling a recession when there is a 12-month drop in NFP looks pretty reliable if one bases it on data as they are actually released at the time, rather than plotting the historically revised data as was done in the previous diagram.

100 times the 12-month change in natural log of seasonally adjusted nonfarm payroll employment as it would actually have been reported at any given date, from ALFRED, with NBER recessions as shaded regions and dashed line at 0.0 threshold.

Finally, Leamer observed that in a recession, the 6-month growth in industrial production falls below -3%. The latest value, -1.7%, still remains a bit shy of that threshold

100 times the 6-month change in natural log of index of industrial production, from FRED, with NBER recessions as shaded regions and dashed line at -3.0 threshold.

Though once again, if you look instead for a drop in industrial production over a 12-month interval, we've now seen that.

100 times the 12-month change in natural log of index of industrial production, from FRED, with NBER recessions as shaded regions and dashed line at 0.0 threshold.

While we're reviewing the week's cheerful news, I should also mention the ISM index. This is based on the Institute of Supply Management's survey of manufacturers. A value below 50 indicates that more companies are reporting deterioration than are reporting improvement in categories such as new orders, production, and employment. September's reading for this index of 43.5 looks pretty recessionary.

ISM Manufacturing PMI Composite Index, from FRED, with NBER recessions as shaded regions and dashed line at 44.0 threshold.

The one indicator that's still holding up is GDP. However, I noted last week that much of the apparent growth in GDP over the last three quarters can be attributed to the statistical discrepancy between income and production data. In any case, we're going to get a new GDP number at the end of this month, and I don't expect it to be pretty.

Comments

[allen b. shay:]

Dear Mr, Edward Leamer,
I am appealing to you because I have made several attempts to contact you by mail and calls to your assistant, to no avail. My reason for contacting you is that President-Elect Obama placed a request to the American people that he wanted to hear from the "fresh and new thinkers" to provide proposals that will help our economy and get this country back on track. Well, I responded, took action and attempted to make contact with the President-Elect and his transitional team, again to no avail. I am a law abiding citizen who help those in my community and now I would like to help those through out our country to deal with the housing and job crisis. I would appreciate if I could communicate this information to you. The programs developed to help our economy will: (1)Stop & Prevent foreclosures within 72 hours after the application is submitted, (2) Stabilize property values and (3) Create 100,000 new jobs per month. These programs can be implemented on January 21, 2009, if the President-Elect and the transactional team learns of this information. As a child, one of the most profound statement ever communicated to all Americans by our leader was when President John F. Kennedy stated "it is not what this country can do for you, it is what you can do for this country". This statement is relevant to today's society and my efforts are to reach out and help other Americans who are suffering as a result of our current economic crisis. Your help is appreciated.
Thank you.

2008 Dec 27 09:36 PM