The Unemployment Rate Is Not Signaling A Recession: Update - December 7, 2018

Georg Vrba profile picture
Georg Vrba
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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 November 2018 rate of 3.7%, 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 November 2018 rate of 3.7% does not signal a recession.

The model relies on four indicators to signal recessions:

  • The short 12-period and a long 60-period exponential moving average ((EMA)) of the unemployment rate (UER).
  • The eight-month smoothed annualized growth rate of the UER (UERg).
  • 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 remained at 3.7%. The short EMA remains below its long EMA, the blue and red graphs, respectively, and the spread narrowed, now at minus 0.22% near last month’s minus 0.24%.
  • UERg had formed a trough in 2015, peaked at minus 4.4% end 2016 and declined to minus 14.1% beginning 2018. Subsequently rising and now at the low level and of minus 11.57%, last month’s minus 10.84% - the green graph.
  • Also, the 19-week rate of change of the UER is now at minus 5.4%, last month minus 6.9%, 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

This article was written by

Georg Vrba profile picture
8.22K Followers
Georg Vrba is a professional engineer who has been a consulting engineer for many years. In his opinion, mathematical models provide better guidance to market direction than financial "experts." He has developed financial models for the stock market, the bond market, yield curve, gold, silver and recession prediction, most of which are updated weekly at http://imarketsignals.com/.

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.

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