Can unemployment claims predict the end of the American recession? by Robert J. Gordon
Since economists are notoriously poor at forecasting turning points, this hope is likely to be dismissed as a will o’ the wisp. But is it wisely dismissed? Recently I have discovered a surprisingly tight historical relationship in past US recessions between the cyclical peak in new claims for unemployment insurance (measured as a four-week moving average) and the subsequent NBER trough.
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To this point I have examined a single indicator to see if it is useful in predicting the end of recessions without any consideration of what is going on in the rest of the economy. Our conclusion is supported by the fact that previous false peaks occurred when new claims were at 80 to 90% of the level at the ultimate true peak. For the peak of 4 April 2009 to be false by this historical precedent, the ultimate future peak would have to be in the range of 730,000 to 800,000. As the weeks go by, such a sharp future increase in new claims looks increasingly implausible.
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My reasoning leads me to conclude that the ultimate NBER trough of the current business cycle is likely to occur in May or June 2009, substantially earlier than is currently predicted by many professional forecasters.
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To this point I have examined a single indicator to see if it is useful in predicting the end of recessions without any consideration of what is going on in the rest of the economy. Our conclusion is supported by the fact that previous false peaks occurred when new claims were at 80 to 90% of the level at the ultimate true peak. For the peak of 4 April 2009 to be false by this historical precedent, the ultimate future peak would have to be in the range of 730,000 to 800,000. As the weeks go by, such a sharp future increase in new claims looks increasingly implausible.
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My reasoning leads me to conclude that the ultimate NBER trough of the current business cycle is likely to occur in May or June 2009, substantially earlier than is currently predicted by many professional forecasters.
Interesting points. Time will tell what happens. I am skeptical this measure alone will prove to be perfect but I can believe it will be one useful measure to consider. I tend to be skeptical we are close to a strong recovery. But at what point the economy moves out of a recession is less certain. I still believe we will be lucky if we show job gains by the end of this year.
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