How watching unemployment may prove a more robust recession tracker than the yield curve:
a novel way to both forecast recessions and make them less severe. Her findings are helpful to investors too. She details a sound metric for tracking recessions early. It's to look for a +0.5% rise in the unemployment rate relative to the unemployment rate's past 12-month low. This metric has called each of the seven recessions back to 1970, never getting it wrong over that period. That's a good success rate, and comparable with the.
Unemployment rising tends to coincide with the very start of a recession. It's a fairly early signal, but it tends to be triggered 1-4 months after the recession begins looking back over history. It's also a robust indicator, some have argued that the inverted yield curve we see today is the result of unique bond market circumstances. We could have a false positive from the yield curve. Whereas the unemployment rate is more directly tied to the immediate fate of the economy.
Civilian Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, June 12, 2019.Sahm isn't just trying to forecast recessions though. She's hoping to smooth them. Her main concept is to tie cash payments to people to when the unemployment spike hits. That could prove a rapid and effective way to combat recessions. If made automatic, it could boost consumer spending right when support is needed.
However, clearly, rising unemployment is an ominous signal especially for the stock market. The unemployment rate as of the most recent May 2019 data is clearly declining on a medium-term view and declining or closer to flat depending on how you interpret the shorter term picture. So we would need rising unemployment to become concerned about this indicator, something we don't have today.
It is therefore interesting to combine the yield curve and unemployment indicators. While the yield curve suggests there is a reasonable chance that a recession is here within a year, the labor market is suggesting that a recession is not happening now. So if a recession is coming, as the yield curve suggests may be possible, then it's likely still several months out based on what unemployment suggests.
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