Seeking Alpha

Employment Leading Or Lagging Indicator?

Includes: RINF
by: The Macro Trader
The Macro Trader
Macro, Long/Short Equity, ETF investing, REITs

If you read much on the business cycle, then you have probably heard that "employment is a lagging indicator". We have read and heard it from the mouths of pundits on TV, economists on TV and in print, and in research reports. But as with anything, just because a lot of people say something doesn't mean it's true. The earth was only flat until someone tried it out and realized it was not.

The same goes for employment. If you use the most basic of employment indicators, the headline unemployment rate, and then match it up with recessions, easily done in Excel with the FRED plug-in (BTW I love FRED and you should too), then you can see that employment is not only NOT a lagging indicator but is not even a coincident indicator. If it doesn't lag and it doesn't coincide, then what is left? Yes, it is a LEADING indicator. Crazy, right? All those people on TV are wrong who would have guessed (read with a heavy dose of sarcasm)?

Here I took the unemployment rate and flipped it to become the employment rate. It is the same data but in a happier, more optimistic format. It is overlaid on the NBER recession dates. If you look at it, and you don't even have to look very closely, you will see that there is a very consistent pattern leading up to a recession. The rate starts to roll over. In the 50's and 60's, it was barely a leading indicator but since then the lead has gotten longer and longer. How it was ever considered a lagging indicator is beyond me.

Percentage of Workforce That Is Employed

Percentage of Workforce That Is Employed

So what is this chart telling us, or indicating to us, right now? Well if you believe the post-WW2 period has any relevance to today, we obviously do, then it is saying that we are not in a recession and are not overly close to entering a recession. Anything can happen and this indicator could be wrong this cycle but based on the data the odds are low.