The Unemployment Rate Is Not Signaling A Recession: Update - April 6, 2018

Summary

• For what is considered to be a lagging indicator of the economy, the unemployment rate provides surprisingly good signals for the beginning and end of recessions.
• This model, backtested to 1948, reliably provided recession signals.
• The model, updated with the March 2018 rate of 4.1%, does not signal a recession soon.

A reliable source for recession forecasting is the unemployment rate, which can provide signals for the beginning and end of recessions (Appendix B charts the UER recession indicator for the period 1948 to 2015). The unemployment rate model (article link) updated with the March 2018 rate of 4.1% does not signal a recession.

The model relies on four indicators to signal recessions:

1. The short 12-period and
2. a long 60-period exponential moving average (EMA) of the unemployment rate (UER).
3. The eight-month smoothed annualized growth rate of the UER (UERg).
4. The 19-week rate of change of the UER.

The criteria for the model to signal the start of recessions are given in the original article and repeated in the Appendix.

Referring to the chart below and looking at the end portion of it, one can see that none of the conditions for the start of a recession are currently present.

• The UER was in a process of forming a trough in 2016 and then declined throughout 2017, but held steady at 4.1% for the fifth straight month. The short EMA remains below its long EMA, the blue and red graphs, respectively, and the spread is minus 0.18% and is below last month's minus 0.21%.
• UERg had formed a trough in 2015, peaked end 2016 and declined throughout 2017, and since the beginning of 2018 is rising again. It is at a low level and at minus 11.76% vs. last month's minus 13.10% - the green graph.
• Also, the 19-week rate of change of the UER is now at zero - last month minus 0.3% - well below the critical level of plus 8% (the black graph).

For a recession signal, the short EMA of the UER would have to form a trough and then cross its long EMA to the upside. Alternatively, the UERg graph would have to turn upwards and rise above zero, or the 19-week rate of change of the UER would have to be above 8%. Currently, the trajectories of the unemployment rate's short and long EMAs are still downwards - none having a positive slope, UERg is far below zero, and the 19-week rate of change of the UER is also way below the critical level.

Based on the historic patterns of the unemployment rate indicators prior to recessions, one can reasonably conclude that the U.S. economy is not likely to go into recession anytime soon.

Appendix A

The model signals the start of a recession when any one of the following three conditions occurs:

The short exponential moving average EMA of the unemployment rate rises and crosses the long EMA to the upside, and the difference between the two EMAs is at least 0.07. The unemployment growth rate rises above zero while the long EMA of the unemployment rate has a positive slope and the difference between the long EMA at that time and the long EMA 10 weeks before is greater than 0.025. The 19-week rate of change of the UER is greater than 8.0% while simultaneously the long EMA of the UER has a positive slope, and the difference between the long EMA at the time and the long EMA 10 weeks earlier is greater than 0.015.

Appendix B

The UER recession indicator is charted over the period 1948 to 2015 below:

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Comments

[drftr]

George,

I'm not the best chart reader out there, but if I look at history the green line has crossed 0 or came very close quite some times and was followed by a recession in about a year. Maybe the 1/2017 high got close enough? Let's wait and see.

Thanks for sharing as always.

drftr

[Cambridge STR]

I just read a recession quickly follows an upturn in unemployment on average in FOUR months. Of course, the recession is announced much later, but since 1950 will begin at around 4 months. following an uptick in unemployment.