UCLA Professor Ed Leamer recently proposed four criteria for determining whether the economy is in recession, and concluded at the time of his study (two months ago) that the U.S. had not yet crossed that threshold. But this week’s data might cause him to change his mind.
Professor Leamer observed that recessions are usually characterized by a 6-month drop in civilian employment of more than 0.4% as measured by the BLS household survey. At the time he wrote his paper, the U.S. fell just short of that standard. But the BLS reported on Friday that this measure fell by 222,000 jobs in September, putting the 6-month change at -0.5%. On the basis of this number, Leamer would now have to change his call.
Leamer further suggested that a 6-month change in the unemployment rate of more than 0.8 percentage points also signals a recession. Although the BLS reported on Friday that the unemployment rate held steady in September at 6.1%, the sharp increase during July and August had already shot us well past Leamer’s threshold for a recession.
Leamer also noted that it’s typically called a recession if the 6-month growth rate of nonfarm payroll employment falls below -0.5%. September’s NFP drop of 159,000 workers leaves us just short of that cutoff, with the 6-month change standing at -0.4%. Feel better now?
I don’t. I prefer to look at whether the 12-month growth rate is negative, as it has now clearly become.
Since the employment numbers are subject to lots of revision, it’s worth noting that calling a recession when there is a 12-month drop in NFP looks pretty reliable if one bases it on data as they are actually released at the time, rather than plotting the historically revised data as was done in the previous diagram.
Finally, Leamer observed that in a recession, the 6-month growth in industrial production falls below -3%. The latest value, -1.7%, still remains a bit shy of that threshold
Though once again, if you look instead for a drop in industrial production over a 12-month interval, we’ve now seen that.
While we’re reviewing the week’s cheerful news, I should also mention the ISM index. This is based on the Institute of Supply Management’s survey of manufacturers. A value below 50 indicates that more companies are reporting deterioration than are reporting improvement in categories such as new orders, production, and employment. September’s reading for this index of 43.5 looks pretty recessionary.
The one indicator that’s still holding up is GDP. However, I noted last week that much of the apparent growth in GDP over the last three quarters can be attributed to the statistical discrepancy between income and production data. In any case, we’re going to get a new GDP number at the end of this month, and I don’t expect it to be pretty.