Note: This commentary has been updated to include Friday's release of Nonfarm Employment for September.
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:
- Nonfarm Employment
- Industrial Production
- Real Retail Sales
- Real Personal Income (excluding Transfer Receipts)
The Latest Indicator Data
This commentary has been updated to include Friday's release of Nonfarm Employment for October. As the adjacent thumbnail of the past year illustrates, Nonfarm Employment remains in its upward trend. October's 161K increase in total nonfarm payrolls was accompanied by a 41K upward revision for September and a 9K upward revision for August (a net revision gain of 53K). The unemployment rate declined from 5.0% to 4.9%. The Investing.com consensus was for 175K new jobs and the unemployment rate to decline to 4.9%.
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The chart below shows the monthly percent change in this indicator since the turn of the century, a period that includes two recessions. The latest 0.11% MoM increase and the 0.13% for the previous month were a bit below the 0.14% absolute change since the end of the last recession. We've included a 12-month moving average to help visualize the trend.
The Problem of Revisions
At first glance 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, subsequent benchmark revisions and annual revisions that stretch back many years (the most recent includes revisions back as far as February 1990). 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 dividing the 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 a callout — not to suggest a forecast but rather to highlight the potential impact of a near-term business-cycle downturn. Note also that the current level is about where we were at the end of 1997. The interim peak was in May of this year.
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.
Assessment and Outlook
The US economy has been slow in recovering from the Great Recession, and the overall picture has been a mixed bag for nearly two years. Employment and Income have been relatively strong. Real Retail Sales have been weak at best over the past twelve months, and Industrial Production has essentially been in a recession, although optimists are hoping that the March low was a trough and IP may now be in recovery mode.
Here is a percent-off-high chart based on an average of the Big Four. The interim high was in November 2014 (fractionally below zero at three decimal places). The indicator primarily responsible for this decline is Industrial Production. Incidentally, the last time the average of the four set an all-time high was in January 2006.
The next updates of the Big Four will be the mid-month releases for Industrial Production and Real Retail Sales.
