May 1, 2009

Is the Recession Over? Flip a Coin.

James Hamilton at Econbrowser has been looking over initial claims for unemployment insurance the past few weeks. His most recent post suggests a 50% chance that the recession may end by June. Remember that unemployment is a lagging economic indicator so that, if we really are nearing the end of the recession, then this decrease in initial unemployment insurance claims is a very good sign. On the other hand, as Dr. Hamilton points out, there's still a very good chance (50% historically) that unemployment claims could go back up again, something that's readily apparent in the first graph in my post back in February on US unemployment levels.

The Labor Department reported today that initial claims for unemployment insurance fell by 14,000 during the most recent available week. That brings the 4-week average down for the third consecutive week and puts it 3.3% below the peak reached April 9.

Black line: seasonally adjusted new claims for unemployment insurance, weekly since January. Blue line: average of 4 most recent weeks as of each date.

That ongoing drop in the 4-week average is noteworthy because in each of the last 5 recessions, once the new claims number began declining from its peak value reached during the recession, the NBER subsequently dated the recovery from that recession as beginning within 8 weeks.


If we leave out the 1970 recession, there are 230 weeks in which the NBER declared the economy to have been in recession during the 5 recessions of 1974, 1980, 1982, 1990, and 2001. In 22 of these weeks, we saw as big a drop as we've seen this month, namely, the 4-week average dropped by more than 3.3% over a 3-week period. Of these 22 favorable readings, 11 turned out to be part of the final move out of recession, while in the other 11, new claims turned back up to reach a subsequent higher peak. Thus, if all you had to go on was the data on new unemployment claims and its behavior in previous recessions, you might conclude that there's a 50% chance that an economic recovery will have started by the beginning of June.

For some other possible signs of "green shoots," check out Bonddad's post on inventory levels in the 1Q09 GDP report.

Update: Economist's View reposted an article by Robert Gordon that was originally published on VoxEU. Gordon has been a member of the NBER Business Cycle Dating Committee since 1978, although this article is his own work and was not written in collaboration with any other member of the committee. The article is a little long and technical, but the quotation below comes from the conclusion:

It is always too early to make definitive conclusions, but the recent 2009 peak in new claims looks sufficiently similar to previous recession peaks to allow a conclusion that it is highly probable that the new claims peak has now occurred. The evidence provided here suggests several differences between the recent peak and previous false peaks in earlier recessions. The recent peak occurred much later in the recession than previous false peaks, and the run-up of new claims in the two months prior to the recent peak was substantially faster than in previous false peaks.

To this point I have examined a single indicator to see if it is useful in predicting the end of recessions without any consideration of what is going on in the rest of the economy. Our conclusion is supported by the fact that previous false peaks occurred when new claims were at 80 to 90% of the level at the ultimate true peak. For the peak of 4 April 2009 to be false by this historical precedent, the ultimate future peak would have to be in the range of 730,000 to 800,000. As the weeks go by, such a sharp future increase in new claims looks increasingly implausible.

Bottomline – The US turn-around will come in May or June 2009

My reasoning leads me to conclude that the ultimate NBER trough of the current business cycle is likely to occur in May or June 2009, substantially earlier than is currently predicted by many professional forecasters.

(Emphasis author's.)


bambam said...

I find it weird, since the main industry in the states will file for bankruptcy during those months and those numbers won't show up on the new claims for atleast another three months. Honestly i think its just spin masters trying to shorten the recession because fundamentally speaking the problems with the banking sector hasn't been resolved and the US economy has a couple of big zombies sucking every drop out of the available bailout, and on the other hand we have a housing market going no where so i'm not really sure how they can call a bottom when non of the fundamental indicators point towards that.

JDsg said...

Normally I might agree, but did you catch the update I just added to the post? ;)