The Unemployment Rate
as a Coincident Recession Indicator: Update
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In an April 2012 article, co-authored with Dwaine van Vuuren, we presented a model using the unemployment rate to provide us with signals for the beginnings and ends of recessions. We concluded then that a recession was not going to happen anytime soon. The model updated with the latest unemployment rate does not change the previous conclusion. Also estimates for future unemployment rate numbers are given and the expected date when a new recession could begin.
The updated unemployment rate indicator
Below is the updated figure 4 from the previous article. The required conditions for a recession signal are:
- 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.
None of the conditions for a recession to start are currently present. The unemployment rate is not forming a trough and its short EMA is well below its long EMA. The UERg is currently at a low level – approximately -9% – since it moved below zero in the middle of September 2010. Also the 19-week rate of change of the unemployment rate is now at about -5%, far below the critical level of 8%, and the probability that a recession will start now is only 0.5%.
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 the unemployment rate's short- and long EMA are still downwards.
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.
Estimates of future unemployment rate
Below are the averages of UERg for the in-between recession periods when UERg was less than zero. Interestingly the numbers all have approximately the same magnitude.
Based on the average of -8.62% of these six periods, and applying this to the April 2012 situation (the date of the original article), one can expect the following:
- The UER will be at 7.8% in Nov-2012 at the time of the election.
- By Dec-2014 the UER will be at a low of 6% and will then rise again.
- UERg will turn positive in Apr-2015 signaling the next recession.
Currently the unemployment rate for September is 7.8%. The October UER will be reported on November 2, four days before the presidential election, and should be then at 7.8% according to my calculations. We shall see soon whether this prediction holds.
Georg Vrba is a professional engineer who has been a consulting engineer for many years. In his opinion, mathematical models provide better guidance to market direction than financial "experts." He has developed financial models for the stock market, the bond market and the yield curve, all published in Advisor Perspectives. The models are updated weekly. If you are interested to receive theses updates at no cost send email request to firstname.lastname@example.org.