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.


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?--
More on the Recession Watch.--

Last Friday, I posted the results of some data analysis on the question whether we are entering a recession. It turns out that others noticed some of the same patterns as I did.

Here is what Bob Willis at Bloomberg wrote (tip to VC commenter Mark Field):

The U.S. economy may be on the verge of — or already in — a recession, based on the increase in 2007's unemployment rate, economists said.

The jobless rate rose to 5 percent in December, the highest in two years. The figure was 0.6 percentage point higher than March's 4.4 percent, which was the lowest reading of the expansion that began at the end of 2001.

"Since 1949 the unemployment rate has never risen by this magnitude without the economy being in recession," John Ryding, chief U.S. economist at Bear Stearns Cos. in New York, said in a note to clients. "We now put ourselves on recession watch."

Before the start of the last contraction in March 2001, the unemployment rate rose just 0.4 percentage point, according to Labor Department figures. The rate barely rose at all ahead of the 1990-91 downturn, one reason why economists consider it a so-called lagging signal.

The National Bureau of Economic Research, which determines when recessions begin and end, defines them as a "significant" decrease in activity over a sustained period of time. The declines would be visible in gross domestic product, payrolls, production, sales and incomes.

The increase in the jobless rate "is disturbing indeed," Victor Zarnowitz, 88, a senior fellow at the New York-based Conference Board and a member of the NBER group that dates contractions, said in an interview. "A lot of people would rule out that a recession is pending. I would not. It's too early to say and it's perhaps not very likely that it will come, but I would not rule it out." . . .

Consumer Spending

Another key area that has yet to issue any alarms is consumer spending, which accounts for more than two thirds of the economy. Spending figures in November were stronger than forecast even as gasoline hovered around $3 a gallon and property values slumped.

That leaves the onus on December retail sales figures, due from the Commerce Department on Jan. 15, to determine whether the American consumer will indeed falter.

"We are spooked by this week's data and very open to a much weaker economic scenario," Stephen Stanley, chief U.S. economist at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in a note. A "collapse" in consumer spending last month would prompt him "to carve up our forecasts for 2008 and start over with much weaker growth" estimates, he said. . . .

"It's not a good situation," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. "It is certainly true that every time the unemployment rate has done what it did today, we are in a recession."

Still, "I don't want to forecast a recession," he said, "I would prefer for the National Bureau of Economic Research to call it a recession."

Note that an unemployment jump is usually a lagging or coincident indicator of a recession. That raises the nontrivial possibility that we entered an economic downturn in December or will enter one in January or February.

Related Posts (on one page):

  1. More on the Recession Watch.--
  2. Has a recession already started?--