Unemployment Claims And The Current Recession Risk
Doug Short | May 05, 2013 01:02AM ET
Every Thursday I post an this illustration ).
For a better understanding of the weekly Initial Claims data, let's view the numbers as a percent ratio of the Civilian Labor Force.
The latest percent ratio of 0.23% means that out of 10,000 workers, twenty three made an initial application for unemployment insurance payments in the last week's data. In fact, the latest data point is close to the low end of the 0.19% to 0.60% range over the last 46 plus years. Initial Claims are substantially below the levels during the business cycles of the stagflation years of the 1970s and early 1980s.
What about Continued Claims? Here is their percent ratio to the Civilian Labor Force.
Likewise with this indicator, we're at the low end of the historic range (1.24% to 4.85%). At present, approximately two persons per 100 are receiving unemployment insurance benefits.
The Unemployment Claims Recession Indicator
What is particularly interesting about this Unemployment Claims ratio series is its effectiveness as a leading indicator for recession starts and a virtually dead-on coincident indicator for recession ends. In both of the percent ratio charts above, I've highlighted the value at the month a recession starts. In every instance the trough in claims preceded the recession start by a few to many months, but the claims peaks were nearly identical with recession ends. Here is a table showing the actual numbers.
The least lead time from a claims trough to a recession start was three months. That was for the second half of the double-dip that began in July 1981. As I've discussed elsewhere, this was basically a Fed engineered recession to break the back of inflation. The Effective Fed Funds Rate hit its historic monthly average high of 19.1% in June of 1981 and its all-time daily high of 22.4% on July 22, the month the NBER subsequently identified as the recession start.
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Current Recession Risk
What does the percent ratio of unemployment claims tell us about our current recession risk? At present, the ratios for both Initial Claims and Continued Claims are trending down. We see in both ratio charts above a tiny Hurricane Sandy spike in late 2012, but otherwise the trend has been steadily downward. Excluding the 1981 recession, the Initial Claims trough lead time for a recession has ranged from 7 to 22 months with an average of 12 months if we include the 1981 recession and 14 months if we exclude it. Admittedly, the last recession is an extreme example, but the Initial Claims trough preceded its December 2007 onset by a whopping 22 months.
If history is even a remotely reliable guide, the current percent ratios of weekly claims to the labor force contradict the minority view that the US is currently in recession (e.g., ECRI and a few bearish bloggers). Instead, the ratios suggests that even a near-term recession is months into the future.
For another interesting perspective on employment and recessions see Georg Vrba latest commentary on the topic, The Unemployment Rate Is Not Signaling a Recession: Update.
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