"Something Went Totally Nuts" At BLS But Labor Market Indicator Still Strongly Suggests Recession
McKelvey-PMES Recession Indicator Weakens Slightly but Signal Still Firm
The McKelvey-PMES recession indicator experienced a slight dip in September, but it still strongly suggests a recession. Historically, under current conditions, the economy has always been in recession when the indicator is at this level. However, the odds are not 100 percent because the National Bureau of Economic Research (NBER) sets recession dates, not these charts.
Understanding the McKelvey Recession Indicator
The McKelvey Recession Indicator is calculated by subtracting the 12-month low from the current value of the 3-month unemployment rate average. If the difference is 0.30 percentage point or more, then a recession has started. This indicator was created by Edward McKelvey, a senior economist at Goldman Sachs. However, the indicator has been criticized for having many false positives.
Claudi Sahm's Revision
Claudi Samn, a former Fed economist, revised the rule and set the indicator to 0.50. However, this still resulted in false positives, so she started her series in 1960.
PMES Acronym
PMES is an acronym for Pascal Michaillat and Emmanuel Saez, economists at the University of California in Santa Cruz. They added a second indicator that eliminates the false negatives and false positives. The data and idea used by PMES and in the charts in this post were provided by Regis Barnichon.
What Is the PMES Second Indicator?
The PMES recession indicator combines job vacancy rates with unemployment data. The indicator is the minimum of the McKelvey indicator and a similar indicator constructed with the vacancy rate.
Vacancy Rate
The vacancy rate is the ratio of job openings to the labor force. The BLS Job Openings and Labor Turnover (JOLTS) report only dates to December of 2000. Regis Barnichon, in 2010, described Building a composite Help-Wanted Index, a measure of vacancy posting over 1951–2009 that captures the behavior of total—print and online— help-wanted advertising, and can be used for time series analysis of the US labor market.
Minimum Indicator
To determine whether there is a recession, PMES takes the minimum of either McKelvey or Job Openings.
Unemployment Rate vs Job Opening Rate
Openings decrease in recessions while the unemployment rate tends to rise. Combining the two ideas makes for a better indicator.
McKelvey Recession Indicator
The McKelvey Recession Indicator has had five false positives.
Job Openings PMES Recession Indicator
The PMES recession indicator has also had false positives. However, the PMES false positives do not overlap with McKelvey false positives. Combining the two indicators creates the lead chart.
The McKelvey Recession Indicator Triggered, But What Are the Odds?
On September 10, a method of calculating recession odds based off McKelvey alone was posted. As numbers rise, the odds of recession rise exponentially not linearly. Between 0.4 and 0.5 the odds of recession are over 50 percent and that is based off a single indicator, not both.
September Jobs Report
The September jobs report is more than a bit screwy, impacting the above calculations. The BLS reports payroll employment rises by 254,000 in September. However, there are reasons to suspect the report. It is unlikely that the economy suddenly added 785,000 government workers in September.
Bottom Line
The McKelvey-PMES recession indicator, despite its slight dip, still strongly suggests a recession. However, the recent jobs report raises questions about the accuracy of these indicators. What do you think about this? Share your thoughts with your friends. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
