Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.
There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:
The Latest Indicator Data
As the adjacent thumbnail of the past year illustrates, Nonfarm Employment has been in a steady upward trend. Friday’s report of 223K new nonfarm jobs in April was close to the Investing.com forecast of 224K. Moreover, March nonfarm payrolls were revised downward by 41K from 126K to 85K. The unemployment rate ticked down from 5.5% to 5.4%.
The chart below shows the monthly percent change in this indicator since the turn of the century, a period that includes two recessions.
The Problem of Revisions
At first blush this indicator appears to have a strong correlation with the business cycle. However, there is a major problem with this assumption: The data in this survey of business establishments undergoes multiple revisions. The initial monthly estimate is subject to a first and second revision and subsequent annual benchmark revisions that can stretch back five years. The cumulative size of the revisions is quite stunning, much of which is owing to the “hindsight” of those annual revisions.
The chart below measures the size of the revisions from the initial estimate to the latest employment report.
The Problem of Population Growth
Another problem with the Nonfarm Employment data is that it isn’t adjusted for population growth, which reduces its usefulness in illustrating secular trends. The chart below incorporates a population adjustment by divided Nonfarm Employment (FRED series PAYEMS) by the Civilian Labor Force Age 16 and Over (FRED series CLF16OV). We’ve added a couple of trend lines and pointers — not to suggest a forecast but rather to highlight the potential impact of a near-term business-cycle downturn.
The Generic Big Four
The chart and table below illustrate the performance of the generic Big Four with an overlay of a simple average of the four since the end of the Great Recession. The data points show the cumulative percent change from a zero starting point for June 2009. We now have all four indicator updates for the 69th month following the recession.
