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Is The Unemployment Rate Predicting A Recession?

On the topic of recession indicators, a major item that we monitor is the employment situation. We follow many data points, but this post will focus on the headline unemployment rate which is typically published on the first Friday following each month. So we will get updated data on Friday morning (at 5:30am PST, in case anyone wants to wake up and receive it "live").

The below charts show the US unemployment rate (blue line), as well as the 12-month moving average (red line). The unemployment figure is released monthly, but is subject to idiosyncratic factors (think natural disasters, government shutdowns, census employment, and so on) and is also subject to multiple revisions. Thus, we also plot the moving average to smooth out some of this noise and better understand the larger trend. For instance, the unemployment rate (blue line) typically increases at least a few times every year and rarely indicates a recession (red bars). However, any increase in the moving average (red line) has resulted in a recession (red bars). In other words, once the unemployment rate starts moving up enough to impact the direction of the moving average, a recession follows shortly thereafter.

The below chart looks fairly ominous. The unemployment rate's decline has clearly decelerated, appears to be turning up, and is also at a level where it has typically bottomed out at in the past. Would you agree?

Although the above chart appears ominous, it is from over two years ago (March 31, 2017)! The lesson is: respect the data. Don't extrapolate current data into the future or start making predictions about the future path of data points. Even a string of a few data points (as we saw in early 2017 above) does not make a trend and certainly must be corroborated by data points/trends from other economic indicators.

 Below is chart that runs though May 2019. 

We are eagerly awaiting the June employment data, which will be published on Friday. We will be looking at the headline numbers and their underlying components, as well as revisions to the data released over the past several months. Yet, it is just another monthly report and one that we'll evaluate within the context of the past 12 months, not to mention all of the other economic indicators that we monitor.

But before we get to that, its BBQ time... Happy Fourth of July!