The Unemployment Rate Is Not
Signaling a Recession: Update
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A reliable source for recession forecasting is the unemployment rate, which can provide signals for the beginnings and ends of recessions. The unemployment rate model (article link), updated with the February figure, does not signal a recession now, nor does it support Economic Cycle Research Institute's recent claim that a recession started in July 2012, nor their September 2011 recession call, nor any of their many "follow-up" recession calls since then.
The model relies on four indicators to signal recessions:
A short 12-period and a long 60-period exponential moving average (EMA) of the unemployment rate (UER), The 8-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 appendix A.
Referring to the chart below, and looking at the end portion of it, one can see that none of the conditions for a recession start are currently present.
The UER is not forming a trough and its short EMA is well below its long EMA - the blue and red graphs, respectively. UERg is currently at a low level, approximately minus 8% – the green graph. Also the 19-week rate of change of the UER is now at about minus 2%, far below the critical level of plus 8% - the black graph.
For a recession to occur, 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 8%. There is no indication that any of this will happen anytime soon; currently the trajectories of the unemployment rate's short- and long EMA are still downwards - none having a positive slope, UERg is far below zero, and the 19-week rate of change of the UER is also way below the critical level.
Based on the historic patterns of the unemployment rate indicators prior to recessions one can reasonably conclude that the U.S. economy is currently not in a recession, and that ECRI's recent claim that a recession began in July 2012 is wrong.
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 recessions all published in Advisor Perspectives. The models are updated weekly at http://imarketsignals.com/.