Doug Short | May 12, 2015 12:56AM ET
There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:
The Latest Indicator Data
As the adjacent thumbnail of the past year illustrates, Nonfarm Employment has been in a steady upward trend. Friday's report of 223K new nonfarm jobs in April was close to the Investing.com forecast of 224K. Moreover, March nonfarm payrolls were revised downward by 41K from 126K to 85K. The unemployment rate ticked down from 5.5% to 5.4%.
The chart below shows the monthly percent change in this indicator since the turn of the century, a period that includes two recessions.
The Problem of Revisions
At first blush this indicator appears to have a strong correlation with the business cycle. However, there is a major problem with this assumption: The data in this survey of business establishments undergoes multiple revisions. The initial monthly estimate is subject to a first and second revision and subsequent annual benchmark revisions that can stretch back five years. The cumulative size of the revisions is quite stunning, much of which is owing to the "hindsight" of those annual revisions.
The chart below measures the size of the revisions from the initial estimate to the latest employment report.
The Problem of Population Growth
Another problem with the Nonfarm Employment data is that it isn't adjusted for population growth, which reduces its usefulness in illustrating secular trends. The chart below incorporates a population adjustment by divided Nonfarm Employment (FRED series PAYEMS) by the Civilian Labor Force Age 16 and Over (FRED series CLF16OV). We've added a couple of trend lines and pointers -- not to suggest a forecast but rather to highlight the potential impact of a near-term business-cycle downturn.
The chart and table below illustrate the performance of the generic Big Four with an overlay of a simple average of the four since the end of the Great Recession. The data points show the cumulative percent change from a zero starting point for June 2009.
Current Assessment and Outlook
The overall picture of the US economy had been one of slow recovery from the Great Recession. We had a conspicuous downturn during the winter of 2013-2014 and subsequent rebound. And weak Retail Sales and Industrial Production during the previous four months have triggered a replay of the "severe winter" meme. Indeed, the average of these indicators in recent months suggests that the economy remains near stall speed.
Background Analysis: The Big Four Indicators and Recessions
The charts above don't show us the individual behavior of the Big Four leading up to the 2007 recession. To achieve that goal, we've plotted the same data using a "percent off high" technique. In other words, we show successive new highs as zero and the cumulative percent declines of months that aren't new highs. The advantage of this approach is that it helps us visualize declines more clearly and to compare the depth of declines for each indicator and across time (e.g., the short 2001 recession versus the Great Recession). Here is our four-pack showing the indicators with this technique.
Now let's examine the behavior of these indicators across time. The first chart below graphs the period from 2000 to the present, thereby showing us the behavior of the four indicators before and after the two most recent recessions. Rather than having four separate charts, we've created an overlay to help us evaluate the relative behavior of the indicators at the cycle peaks and troughs. (See the note below on recession boundaries).
As for the start of these two 21st century recessions, the indicator declines are less uniform in their behavior. We can see, however, that Employment and Personal Income were laggards in the declines.
Now let's look at the 1972-1985 period, which included three recessions -- the savage 16-month Oil Embargo recession of 1973-1975 and the double dip of 1980 and 1981-1982 (6-months and 16-months, respectively).
Here is a close-up of the average since 2000.
Each of the four major indicators discussed in this article are illustrated below in three different data manipulations:
Industrial Production
The US Industrial Production Index (INDPRO ) is the oldest of the four indicators, stretching back to 1919, although we've dropped the earlier decades and started in 1950.
Real Personal Income Less Transfer Payments
This data series is computed as by taking Personal Income (PCEPI ). We've chained the data to the latest price index value.
The "Tax Planning Strategies" annotation refers to shifting income into the current year to avoid a real or expected tax increase.
Transfer Payments largely consist of retirement and disability insurance benefits, medical benefits, income maintenance benefits (more here ).
The chart below shows the Transfer Payment portion of Personal Income. We've included recessions to help illustrate the impact of the business cycle on this metric.
Total Nonfarm Employees
There are many ways to plot employment. The one referenced by the Federal Reserve researchers as one of the NBER indicators is Total Nonfarm Employees (PAYEMS ).
This indicator is a splicing of the discontinued retail sales series (CPIAUCSL ). We've used a splice point of January 1995 because that date was mentioned in the FRED notes. Our experiments with other splice techniques (e.g., 1992, 2001 or using an average of the overlapping years) didn't make a meaningful difference in the behavior of the indicator in proximity to recessions. We've chained the data to the latest CP we've valued.
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