A Coincident Recession Indicator
April 17, 2012
Conditions that indicate recession starts and ends
Recessions generally start when one of the following three conditions occurs:
- The short EMA of the unemployment rate rises and crosses the long EMA to the upside, and the difference between the two EMAs is at least 0.07.
- UERg rises above zero, the long EMA of the unemployment rate has a positive slope, and the difference between the long EMA at that time and the long EMA 10 weeks before is greater than 0.025.
- The 19-week rate of change of the unemployment rate is greater than 8.0%, while simultaneously the long EMA of the unemployment rate has a positive slope and the difference between the long EMA at the time and the long EMA 10 weeks earlier is greater than 0.015.
Recession ends are generally signaled when:
- UERg as calculated from a 4-week moving average of the unemployment rate crosses from above to below UERg as calculated from a 15-week moving average, and UERg as calculated from a 15-week moving average is greater than 20%.
Probability of recession start
We calculated the probability a recession will start in any given week based on the features which generally indicate recession starts.
The following probability curve resulted over the lifespan of the data (Figure 3):
This is a very satisfactory result, given especially that it is derived, essentially, from a single factor -- the unemployment rate.
Present conditions
The ends of the graphs in Figure 4 depict the current situation, with the March 8.2% unemployment number included. The graphs are plotted to the beginning May 2012, when the April unemployment statistics will be released.
We see none of the conditions for a recession to start. The unemployment rate is not forming a trough. Its short EMA is well below its long EMA. The UERg has had a negative slope since the last week of September 2011, when ECRI made its recession call. Additionally, the UERg is currently at its lowest level – approximately -11.4% – since it fell below zero in the middle of September 2010.
Also the 19-week rate of change of the unemployment rate is now -6%, far below the critical signal level, and the probability that a recession will start now is zero, as shown by the light blue probability of recession graph.
For a recession to occur, the unemployment rate graphs would have to, as a minimum requirement, move sideways for a while and then turn upwards. Alternatively, the UERg graph could turn upwards and rise above zero, or the 19-week rate of change graph of unemployment rate itself would have to approach 8%. There is no indication that any of this will happen anytime soon. Currently the trajectories of both the unemployment rate and its growth rate are downwards, as was the case after all previous recessions.
One can therefore reasonably conclude, based on the historic evidence of these unemployment-based indicators, that there will be no recession in the near future and that ECRI’s recession call may have been premature.
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