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Has a recession already started?--

Are we in an economic recession?

According to figures released by the Dept. of Labor Friday morning, December civilian unemployment jumped three-tenths of a percent from 4.7% to 5%, representing a .6% increase over the March 2007 rate of 4.4%.

According to historical statistics that I analyzed today, since 1948 there were 160 prior months when there was a .6% or greater increase in the unemployment rate over the trough (minimum) unemployment rate of the prior 9 months. Every single one of these 160 indicator months fell before, during, or after one of the 10 recessions since 1948.

Looking at the 10 recessions since 1948, this .6% indicator coincided with the start of the recession in one case (1980), with the 3d month in two cases (1970 & 1990), and with the 4th month of the recession in four cases (1953, 1981, 1974, & 2001). In three of the ten cases, the indicator preceded the recession: in 1957 the indicator month preceded the recession by 2 months, in 1959 the indicator month preceded the recession by 6 months, and in 1948 (the first year of the Labor data) the indicator month preceded the recession by 8 months.

In other words, since the 1960-61 recession began in April 1960, every one of the 115 months with an unemployment rate .6% higher than one of the prior 9 months was either during a recession or in the aftermath of a recession.

Further, in every recession cycle, in the first month that included both a .3% jump from the immediately prior month and a .6% increase over the trough of the prior 9 months, we were already in a recession by the time the data was reported (in the following month).

If the past is any guide to the future--and anyone doing backtesting knows that it often isn't--then we are probably already in a general recession (or will be in one by August at the latest).

This conclusion is consistent with some work I did last summer showing that since World War II, substantial housing declines always preceded or coincided with recessions:

Since World War II, there have been three sharp housing price declines (in real dollars):

the 1947-48 housing price drop, preceding the Nov. 1948 -- Oct. 1949 recession,
the 1979-82 housing price drop, preceding the July 1981 -- Nov. 1982 recession (and also coincident with the Jan.-July 1980 recession), and
the 1989-91 drop, associated with the July 1990 - March 1991 recession.

Caveats:

1. A recent survey of top money managers, CNBC's Trillion Dollar Survey, found that 98% of the 60 experts surveyed put the chances of a recession in 2008 at 50-50 or less. As someone with far less expertise than they, I would put the chances of a recession in 2008 at perhaps 75-90%. While (social) science does not work by consensus, a wise person should probably give more weight to the opinions of 59 of the 60 experts than to my opinion (shared by only one of the 60 experts surveyed by CNBC.

2. The unemployment data is frequently revised up or down a little based on later data, so the 5% December unemployment rate may change. Thus, the indicator I use here may disappear (though even a .5% increase to 4.9% is usually associated with a recession).

3. Because unemployment often continues to rise long after a recession officially ends, I needed to use a cut-off for determining the length of the aftermath of a recession. I treated recession unemployment as having peaked (and a new cycle resetting) when (1) the recession has ended, (2) the .6% indicators cease, and (3) unemployment drops to a level at least .3% below its peak from the prior 12 months. [I have more on this caveat in the comments.]

Related Posts (on one page):

  1. More on the Recession Watch.--
  2. Has a recession already started?--
Dales (mail) (www):

Every single one of these 160 indicator months fell before, during, or after one of the 10 recessions since 1948.


I sure hope I was just reading that line wrong.

But you know what? Every singe time I have stubbed my toes, it has happened either before, during, or after a rainfall.

I mean, doesn't before, during, and after cover totality?
1.5.2008 12:14am
Will Conway (www):
.3% just isn't that much...
1.5.2008 12:20am
James Lindgren (mail):
Dale:

You raise a reasonable question.

I know that the caveats are hard to understand without looking at the data itself, but your question is mostly covered by caveat #3.

Here's a little more info:

Before last month, there were 719 months since 1948. If one takes the 10 recession periods starting either with a recession or with the first .6% signal and treats the aftermath as continuing through the unemployment peak described in caveat #3, then there were a total of 210 months that were before, during, or after a recession. There were .6% signals in 160 of these 210 months. In the other 509 months that were not treated as before, during, or after a recession, there were no .6% signals.

If one chose 8 months prior to the start of the recession as the beginning of the period in every case, then there would be 271 months before, during, or after a recession under caveat #3 (of which 160 contained .6% indicators). In the other 448 months that were not treated as before, during, or after a recession, there were no .6% signals.


Jim Lindgren
1.5.2008 12:54am
Curt Fischer:

(social) science does not work by consensus


But the economy does, doesn't it? As in, (a majority of) everyone has to believe the economy is receding for it to keep doing so. And, everyone has to believe in a bubble for it to keep inflating.

Right? (I'm certainly no economist.)
1.5.2008 12:55am
Elliot123 (mail):
They might have to believe in the bubble to keep it inflating, but that belief can't stop it from burtsing.
1.5.2008 3:04am
K. Dackson (mail):
Uh, guys. While y'all may be brilliant lawyers, and I am just an engineer, even I know that a recession is defined as a decline in GDP over 2 or more consecutive quarters.

Trying to divine this from unemployment data is pure nonsense. Especially when economists define "full employment" at something like 5% unemployment. Subprime "crisis" or not.

So, please answer: How can we be in a recession when the economy is growing (and has been since 2001) and we are at full employment?
1.5.2008 8:35am
liberty (mail) (www):
K. Dackson is correct. That is the official definition of recession.

I would add that you should take into account the absolute level of unemployment as well as the change in unemployment (your 0.6% signals).

From 1970 until 1997 we were above 5% unemployment - that entire period could be considered a recession (depending on your necessarily arbitrary definition).
1.5.2008 9:23am
liberty (mail) (www):
Oh, yes, I meant to provide another reason why it is important to include the absolute level. The dip below 5% in 1997 was part of a bubble. After the bubble burst in 2001, a return to a "normal" 5% unemployment was predicted by many economists - with or without recession. The fact that we returned below 5% in 2006 doesn't mean that rising back up slightly above 5% is a signal of recession-- it could be that fluctuating around 5% is normal.

Your statistics are interesting, and like technical stock market analysis, might point to important trends. But they might not. They might just be noise. There are many patterns one can find that highlight many things, many of which are not relevant because they don't take the right things into account.

You need a theory behind your patterns. I'm not sure exactly what your theory is, except that you seem to be assuming that the unemployment rate (as opposed to the number of new jobs created, the net loss of jobs, the trends in new investment, the growth of new startups, the number of new dollars invested, or any number of other economic indicators) is an important indicator of a coming recession.
1.5.2008 9:30am
K. Dackson (mail):
Aslo, you should note that periodically they change the definition of what actually counts as unemployment. I believe it was redefined just a few years ago.

Therefore, unemployment is is a moving target and cannot be used to quantify long term trends.

Unfortunately, this whole discussion and the original post smacks of election year politics - redefining the term "recession" to try to pin a recession on Bush and the Republicans when it is obvious from the economic data that the economy is chugging along at 2-4% annual growth with low inflation (albeit up slightly the past 3 years). Not a recession by any stretch.

It sounds like a replay of "the worst economic president since Hoover" canard. I cannot decide whether it is willful fabrication or deception.
1.5.2008 9:36am
kdonovan:
Isn't it problematic to use a .6% rise in unemployment as a predictor of a recession when you define a recession by a .6% rise in unemployment?

Kevin
1.5.2008 9:50am
Bart (mail):
Unemployment is generally a lagging indicator after GDP begins to fall towards recession. GDP surged by 4.9% last quarter.

As discussed above, 5% unemployment is hardly considered to be a harbinger of recession. How many recessions have started with a half point increase to 5%?

Moreover, this blip is based on the preliminary results of a single month's employment report, which will very likely be revised again and does not by itself show a trend.

I would be very curious how many of these folks looking for jobs and are unable to find them are illegals. There is a great deal of anecdotal evidence that employers under pressure from the federal and state governments are backing off from hiring illegals and the newly unemployed illegals are considering self deportation.
1.5.2008 9:58am
Dales (mail) (www):
OK, that makes sense. I should have read it as "immediately before, during, or immediately after" with immediately being defined as the window you specified.

That makes sense.
1.5.2008 10:30am
Crimso:
"Unfortunately, this whole discussion and the original post smacks of election year politics - redefining the term "recession" to try to pin a recession on Bush and the Republicans"

Bingo. I noticed some time ago the increasing news reports of how bad the economy is. It's what's known as "battlespace preparation."
1.5.2008 10:34am
Waldensian (mail):

It's what's known as "battlespace preparation."

You may well be right. But it's difficult to imagine how anyone could do a better job of preparing this election battlespace than W himself. And believe me, I'm no fan of the Dems.
1.5.2008 10:43am
Crimso:
"than W himself"

I'm sorry. What exactly was it he did to wreck the economy? Just because you think he's screwed up a lot, shouldn't entitle people to make gratuitous assertions about the economy.
1.5.2008 11:00am
K. Dackson (mail):
It is laughable to assert that the President - any president - can single handedly influence a world-wide economy of 6 Billion people by and large making individual decisions on a day to day basis.

Especially since only about 5% of the world's population resides in the US. At the very least there is the complicity of Congress, the markets, the Fed and individuals to worry about.

That being said, all Bush did was to reduce taxes (a net positive for the economy), strengthen financial reporting requirements (a net positive for investors and, by extension, the economy), managed to keep government more or less from meddling with markets (re: price "gouging" of oil companies).

And before you all go ballistic, remember the economy is far more than simply the federal budget.
1.5.2008 11:25am
John Quincy Public:
K. Dackson: As an engineer I know I don't have to school you on the difference between absolutes and deltas in a value. So first off, Lindgren's point was about the deltas reported by the government.

You rightly point at this number is defined -- cooked if you will -- by the government and so a suspect indicator. However, you then use inflation and GDP growth as support for your assertions.

You are aware that GDP growth is adjusted for inflation? And that inflation is also cooked by the government?

Put it this way, if the government tinkers the basket of goods and understates inflation it will, by corollary, show growth in the GDP that did not occur otherwise.

Now that doesn't mean that Lindgren is right or wrong. But trying to refute his argument about government tinkered deltas by holding up different government tinkered deltas isn't going to cut it. And it's certainly not going to help you if you mistakenly harp on the absolute value that wasn't his point.
1.5.2008 11:50am
SenatorX (mail):
So, please answer: How can we be in a recession when the economy is growing (and has been since 2001) and we are at full employment?

Thus John Quincy Public answers this question: the books are cooked. Everyone knows this but apparently nobody can do anything about it.
1.5.2008 12:01pm
anomie:
This analysis of unemployment rates is superfluous. Recession is inevitable because Iowans rejected Hugh Hewitt's candidate, Mitt Romney.

Really.
1.5.2008 12:16pm
Gene Hoffman (mail) (www):
The data quality of government released public data is getting poorer and more subject to revision. The ISM non Manufacturing report which came out Friday morning makes it look very likely that the headline unemployment number will be revised up next month. It also implies a 2.5%+ GDP growth rate in the 4th Quarter. There is a whole lot of doom mongering about growth but I can tell you that the West Coast economy leading indicators (like traffic) are not suffering at all.

-Gene
1.5.2008 12:16pm
James Lindgren (mail):
K Dackson:

Different economists define a recession in different ways. I used the respected National Bureau of Economic Research (NBER) declarations of past recessions.

Here is a FAQ from their website:


FAQs

Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?

A:: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. According to current data for 2001, the present recession falls into the general pattern, with three consecutive quarters of decline. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.

According to NBER data, the shortest post-1948 recession was 6 months.
1.5.2008 1:29pm
just (mail):
The world great depression following the large sudden fall of stock prices was caused in 1929 since the income deregulation plan decreased to 25% though it was misunderstood that the United States misunderstood the preferential treatment to the income gainer and the property owner in 1925 as a correct selection, and the tax system was irrelevant to business, and praised the boom at the high graduated income tax rate of 50-73% at that time was executed, and it continued for four years. "

It does a graduated tax increase ..the income restriction reinforced doing.. : from 25% of the top rate of income tax to 63->92% in dramatic form three years later though put on "The United States is a real ..recover completely of national revenue before burst of the economic bubble of holding off.. economic recovery orbit as for the rise in the unemployment rate in only six years". The theory of this thesis is not being recognized even by the United States, and the tax increase plan of this United States is evaluated as the policy unavoidably taken, and is clear also in forcing a large tax cut policy of Reagan Administration that generates large-scale fiscal deficit after 50 years and present child Bush administration.

However, it splendidly made it big to real economic growth and the achievement of the fiscal reconstruction simultaneously in the tax increase policy of the criticized graduated income tax etc. according to this analysis when Clinton administration after the political power of Reagan failed claptrap.
1.5.2008 1:36pm
Crimso:
It's settled then. We can't possibly say whether the economy is good or bad since the books are cooked. Guess we'll have to remove discussion of economics from the political sphere. Or are people suggesting we simply redefine "recession?" Cause if we're gonna go there, there's some other things that need to be redefined so I can finally win an argument.
1.5.2008 1:59pm
Charlie (Colorado) (mail):
Jim, I don't mean to be harsh about this, but do you have any background in mathematics? Logic? Arithmetic?

(1) On the initial sentence, I'm sure you meant for it to make sense, but it didn't; it was vacuous. I'm not cconvinced of your extended statement either, but before discussing it, I'd like to be sure it's stated cleearly: do you suppose you could try once more to say it with some rigor, and concisely?

(2) You note that while their definition is different than the common two-quarter rule, but that "[a]ccording to NBER data, the shortest post-1948 recession was 6 months." I presume that the NBER definition is meant to describe more or less the same phenomenon as the two-quarter definition --- it hardly makes sense to use the same word for two different phenomena. But then the shortest possible recession by the two-quarter definition is necessarily two quarters, ie six months. Do you suppose there is any connection?

Not that you've said anything like the silliest thing so far, which would have to be "SenatorX"'s "argument":

Thus John Quincy Public answers this question: the books are cooked. Everyone knows this but apparently nobody can do anything about it.


Now, we have a situation in which various measures, some of them not government measures, like, eg, the stock market, are at or near historic highs and comparable to highs at times that were considered economically good, but still "John Quincy Public" thinks the information is bad because the "books are cooked."

As was noted in a recent Gateway Pundit posting, one thing that can easily be documented is that in 1996, a gain from 5.4 to 5.6 percent in unemployment was reported as not being particulkarly significant, and 5.6 percent unemployment was historically good... while in 2007, a gain from 4.5 percent to 5 percent was noted as being massive, and 5 percent was bad.

Do you suppose this could have any connection with "John Quincy Public"'s perceptions, versus measurements? And if so, which was cooked?
1.5.2008 3:33pm
RJS (mail):
Sorry, people:
It has been a while since I got my master's in economics, so economists may take issue with me.

The NBER's official definition of a recession is so vague as to used most politically, "a significant decline in economic activity spread across the economy, lasting more than a few months." Under that definition, a recession can be defined to fit almost any circumstance. The driver behind any unusual definition of recession is almost always politics, and this smacks of that and statistical manipulation. There was a research paper years ago that gave an even clearer trend between the number of hogs slaughtered and the number of econ graduates.

Further:

A. Economic activity depends on consumer and producer expectations.
B. expectations are driven by information.
C. information is often driven by politics.

Using a tighter standard of recession, such as the
GDP, we are not in recession, but could be driven to one if hysteria takes hold. Nor under most circumstances would a rise in unemployment of half a percent, much less anything remaining under 6%, create a recession hysteria outside of 1) an election year and 2) with a republican incumbent.
An no, I am not a republican, just have gone through too many election cycles not to notice.
1.5.2008 3:55pm
RJS (mail):
Oops, forgot.

There is also a problem with using a percentage increase in a percent. A .3% increase in unemployment with unemployment around 10% would not be counted as a 6% increase, but is at the 5% level.
The trend would be better served looking at the true .3% increase. I don't think a correlation between a .3% increase in unemployment and recession would be found.

Another point, according to Jim Lingren's figures, there was only 50 months of recession since 1948? So, this economy is considered a recession, but the Ford/Carter years at double digit unemployment are not? Amazing.
1.5.2008 4:10pm
SenatorX (mail):
Charlie price the DOW in gold and tell me again about its new highs. You would have to be a fool to believe the economic numbers coming out from the government. Have you looked into the BLS birth/death model? How about the inflation indexes?

Crimso, no but we can look for other indicators than those given out by the government. We can also move toward more transparent methods and data.

Of course the president is meeting with the plunge protection team right now (which most said was a conspiracy theory) and is going to announce some sort of economic boost package. But hey Charlie that's an indication that everything is going great right?
1.5.2008 4:11pm
K. Dackson (mail):
JQP:

You must, of course, realize that the historical rate of inflation over the entire 20th century is only 3%.

But, if you do not like the potential for cooking the books, look at short term government bond yields as a proxy (admittedly not perfect, but close enough). The market prices those and the yields are still near historical lows.

You must also realize that the definition of GDP is quite simple: Total value of goods and services produced. The simpler the measurement, the tougher it is to "cook" it. But than again, if you are afraid of this being "cooked", look at the return of the S&P500 over the past 5 or so years. When did the market actually have a negative annual return post 9/11? The market is a leading indicator of the economy.

I would imagine that by the standard measure of GDP since mid-2001, including the shock from 9/11, you will find that there were no 2 consecutive quarters where GDP declined.

So we have:

1) Full Employment as typically defined by professional economists and,

2) Historically average inflation, or if you don't like that, historically low bond yields (a good proxy) and,

3) No 2 consecutive quarters of falling GDP (the economists definition), or if you don't like that, no negative returns for the S&P 500 over the past 5 years.

No recession here; nothing to see, please move along.

If you want to see a recession, that is your right and privelege. However, most trained economists and investors would laugh you out of the room.
1.5.2008 5:25pm
liberty (mail) (www):
"We can also move toward more transparent methods and data. "

- SenatorX

Like what, naked statisticians parading down the streets? We have about as transparent a data system as theoretically possible. Not to mention the private sector (private polling, private statistical agencies, stock market, etc etc etc).
1.5.2008 6:46pm
SenatorX (mail):
Well I would say we don't need the fed setting interest rates or for intervening in the market. The BLS is opaque and the typical jobs report is from another planet. The revisions are astounding for something touted as so important. The CPI/PPI hardly passes a smell test by extracting key components of people's expenses because of "volatility". Also changing the whole methodology periodically is one step short of doing a Chavez and loping off two zeros on the dollar, voila inflation is gone!

Doesn't everyone know this is done to limit inflation linked government obligations?

I would agree we appear to do a better job than most of the word, and I think we prosper for it. The system is losing credibility fast though with all the off book, level 3, mark to myth derivatives. I think it starts with the government though. People believe there is regulation to protect them but in reality the foxes have been in charge of the henhouse for a long time.

One of the reasons for the credit crunch that is occurring right now is a lack of transparency. Banks are taking money from the gov teat but not loaning it further. They all have treasure holds full of rotten debt and they have to assume everyone else does too. Nobody wants to sell it because on the open market they get a 90% haircut (see etrade). In my opinion we are all better off setting up more transparent markets and suffering whatever creative destruction we need to. Otherwise we are facing a Japanese style decade of deflation with zombie corporations and everything.
1.5.2008 8:02pm
liberty (mail) (www):
Wait I'm confused SenatorX - are you worried about inflation or deflation?
1.5.2008 8:59pm
SenatorX (mail):
I'm worried about losing my wealth to government hijinx. It is very hard to determine what to do with your money when the rules keep changing. When the value of things are hidden and the rules keep changing it doesn't make for a good investment landscape.
1.5.2008 9:54pm
pmorem (mail):
These are seasonally adjusted numbers.
What it actually means is that retail did not add as many temporary jobs as usual.
1.5.2008 10:31pm
Aleks:
Re: Also, you should note that periodically they change the definition of what actually counts as unemployment. I believe it was redefined just a few years ago.

I don't think so, though there may have been some changes to how the data is collected. "Unemployed" is defined as a person who is not working at least one hour a week but who desires to be. That definition has not changed in years. It's also very hard to deliberately "cook" the statistic since any economic research entity (say, a major university) can conduct an employment survey independently and any attempt to fudge the numbers would be very easily contradicted. It is however very true that the unemployment number is a very rough figure that hides all kinds of detail, notably (remember, the one hour a week) a lot of underemployment.
1.5.2008 10:43pm
Houston Lawyer:
As I recall, there are two surveys done by the government, one of employers and one of households. The household survey typically reports more jobs, so it is ignored. Then after about a year the employer survey is increased to match the household survey.

As I recall, we never had two quarters of GDP decline in 2001 either.
1.5.2008 11:10pm
John Quincy Public:
"But, if you do not like the potential for cooking the books," -- K. Dackson

Sir, I was responding only to the error in your argument; not making an argument myself. You are the one that mentioned cooking the books in regards to the absolute value of unemployment. (Which is true) And hinged your objection on that point; Lindgren's argument was about the delta in the cooked absolute number.

Inflation is a delta that is moreso cooked than unemployment; and that is critical. The GDP that you harp on is adjusted by the inflation numbers. If, by your argument, an actual variance is to be discarded because the underlying absolute is cooked -- then your argument is even more facetious as you prop up a cooked delta as a refutation. A cooked delta. Think about it.

A number of others in response here could learn a great deal from your failure to understand this basic point.
1.6.2008 2:13am
K. Dackson (mail):
JQP:

If you change the basis of neasurement, then any delta in the measurement becomes meaningless.

Does comparing apples to oranges mean anything?

The point is that some people here (aparrently the author and you in particular) are trying to fudge the definitions of what constitutes a recession to suit their own agendas.

And the MSM is more than happy to be a partner in the deception. Anything to cook the books to help elect a Democrat this year.
1.6.2008 7:37am
MarkField (mail):
Jim, you may already be aware of this, but Bloomberg mentioned this same point today. Link.
1.6.2008 3:56pm