The Unemployment Rate is Not Signaling a Recession: Update December 2, 2016
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 November figure of 4.6%, does not signal a recession now.
The model relies on four indicators to signal recessions:
- The 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 the Appendix.
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 was in a process of forming a trough, the short EMA remains below its long EMA – the blue and red graphs, respectively, the spread widened to minus 0.21% (last month minus 0.10%).
- UERg has formed a trough in 2015, but still at a low level of minus 4.82% (last month minus 3.15%) – the green graph.
- Also the 19-week rate of change of the UER is now at minus 5.9% (last month plus 1.1%), well below the critical level of plus 8% – the black graph.
For a recession signal, 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%. 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 not likely to go into recession anytime soon.
The model signals the start of a recession when any one of the following three conditions occurs:
- The short exponential moving average (EMA) of the unemployment rate (UER) rises and crosses the long EMA to the upside, and the difference between the two EMAs is at least 0.07.
- The unemployment rate growth rate (UERg) rises above zero, while 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 UER is greater than 8.0%, while simultaneously the long EMA of the UER 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.
No Recession Is Signaled By iM’s Business Cycle Index: Update December 1, 2016
Knowing when the U.S. Economy is heading for recession is paramount for successful investment decisions. Our weekly Business Cycle Index (BCI) would have provided early reliably warnings for the past seven recessions.
The BCI at 212.5 is down from last week’s 213.0. It is below the previous p high of this Business Cycle as indicated by the BCIp at 96.1. The 6-month smoothed annualized growth BCIg at 14.5 is unchanged from last week.
Figure 1 plots BCIp, BCI, BCIg and the S&P500 together with the thresholds (red lines) that need to be crossed to be able to call a recession.
The BCI was designed for a timely signal before the begin of a recession, and could be used as a sell signal for ETFs that track the markets like (SPY), (IWV) or (VTI) etc, and switch into treasury bond ETFs like (IEF),(TIP) or (BND) etc. (see our article.)
The BCI uses the below listed economic data, and combining the components for the index in “real time”, i.e. the data is only incorporated into the index at its publication date.
- 10-year treasury yield (daily)
- 3-month treasury bill yield (daily)
- S&P500 (daily)
- Continues Claims Seasonally Adjusted (weekly)
- All Employees: Total Private Industries (monthly)
- New houses for sale (monthly)
- New houses sold (monthly)
The 6-month smoothed annualized growth rate of series is a well-established method to extract an indicator from the series. We use this method to obtain BCIg, i.e. the calculated growth rate with 6.0 added to it, which generates, on past performance, an average 11 week leading recession signal when BCIg falls below zero. Further, the index BCI retreats from its cyclic peak prior to a recession in a well-defined manner allowing the extraction of the alternate indicator BCIp (and its variant BCIw) from which, on average, 20 week leading recession signal is generated when BCIp falls below 25. A more detailed explanation/description can be found here and weekly updates are sent by email to subscribers of iMarketSignals (no paid membership is required). Also, the historic values can be downloaded from iMarketSignals as an MS excel sheet.
Figure 2 plots the history of BCI, BCIg, and the LOG(S&P500) since July 1967, and Figure 3 plots the history of BCIp, i.e 46 years of history which include seven recessions, each which the BCIg and BCIp managed to indicate timely, the weeks lead to a recessions are indicated on the plots.